Recession… it’s not a word that anyone wants to hear, but it’s one that we’ve been hearing a lot of lately; so, what is a recession? Well, that depends on who you ask. The classical definition for a recession is two consecutive quarters of declining Gross Domestic Product (GDP), and when you start to hear the news anchors shouting that we’re in a recession, it’ll be because that two-quarter definition has been met. It’s a clear-cut definition, and one that is incredibly easy to measure… but it’s also one that economists came up with, and they don’t call economics the dismal science for nothing. Ask any economist and they’ll tell you with certainty that we’re not in a recession, but ask any random person off the street and they’ll tell you that gas costs six bucks a gallon, of course we’re in a recession. An economist will point to low unemployment rates as proof that a recession hasn’t yet hit us, but everyone else looks at the struggling stock market and secretly thinks that the economist doesn’t know what they’re talking about. In reality, the economist is simply looking at vastly different things than the average person. Most people are seeing gas prices over 50% higher than last year (1), and their 401k account down 20%, which are highly visible numbers. A vast majority of Americans have to buy gas to get to work, meaning that high gas prices are immediately felt in the budget of millions of people; the struggling stock market is in the news nearly every day, and many people are consistently checking their retirement/investment account balances and seeing numbers that don’t line up with where they thought they’d be. Don’t get me wrong, these factors are incredibly important to the health of the economy, and they certainly impact whether or not the United States is in a recession; however, the economists aren’t blind, and they definitely have a few valid arguments themselves. First on that list is unemployment. If you look back to the “great recession” of 2008, you’ll see that the unemployment rate was around 5% when the U.S stock market famously crashed (2). This number wasn’t all that high for a recession, but it had been slowly increasing for several months, and would subsequently rise to 10% in the aftermath of the crash (2). Compare this to today, where unemployment is at 3.6% and has been steadily decreasing ever since the initial pandemic response in 2020 (3), and you can see where economists might be hesitant to call this a recession. When you couple this with the fact that the stock market has been steadily dropping for months, it paints a picture of a resilient workforce that remains unaffected by the economic environment. One other factor that economists have been looking at is Personal Consumption Expenditures, which measures consumer spending. In a recession, this number tends to decrease as people feel the need to reduce their discretionary spending, meaning things such as vacations or eating out are cut from budgets. When you take a look at the 2022 data however, you see that consumer spending has increased every single month so far this year (5). Simply put, this is just not something you often see in a recession, and it makes it extremely hard for economists to go ahead and throw that label out there.
So, are we in a recession? Well, that too depends on who you ask. All I can tell you is that unemployment is extremely low and has been consistently decreasing, and consumers have been consistently increasing their monthly spending, both of which seem to point to the fact that the United States has not yet fallen into a recession. To those of you who are looking at the S&P 500 down nearly 20% year to date and thinking: “How could we not be in a recession?” Economist Paul Samuelson famously said that “The stock market has predicted nine out of the last five recessions,” (4) meaning that the market is often pessimistic about the state of the economy, and maybe more importantly, that the stock market (while interconnected) is not the same thing as the economy.
Written by: Ben Bulchik
These are the opinions of Ben Bulchik and not necessarily those of Cambridge, are for information purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. The strategies discussed herein are not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. However, prior to opening an account, Cambridge will consult with you to determine if your financial objectives are appropriate for investing in the model. You are also provided the opportunity to place reasonable restrictions on the securities held in your account.
1: https://www.barrons.com/articles/things-to-know-today-51655890225
3: https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm
4: https://www.barrons.com/articles/bear-market-recession-spiral-fed-51655159287
5: https://www.bea.gov/news/2022/personal-income-and-outlays-may-2022