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Canopy Commentary - Recession

Canopy Commentary - Recession

August 03, 2022

Consumers often recognize that the U.S. economy has entered a recession long before the economists get around to declaring it.  That appears to be the case today.  The U.S. Bureau of Economic Analysis just announced that the U.S. gross domestic product (GDP), the broadest measure of economic activity, declined at a 0.9% annualized rate in the second quarter of 2022.  That follows a 1.6% annualized decline in the first quarter.  Two consecutive quarters of negative GDP tends to meet an unofficial definition of a recession.

The report noted a decrease in retail trade and residential investment, and sluggish personal consumption expenditures, perhaps triggered by surging inflation.  Even so, the National Bureau of Economic Research (NBER), which is technically in charge of declaring recessions, has not yet made that declaration, and may not do so for several months.  Indeed, even in the Great Recession of the financial crisis, the NBER did not declare it a recession until 12 months after it began.

The hesitation may be warranted this time around.  NBER economists tend to look beyond GDP to a variety of economic statistics.  Unlike most recessionary periods, the U.S. job market remains strong; indeed, the nation added more jobs in June than expected, and as the GDP announcement was coming out, applications for unemployment insurance dropped.  The unemployment rate is still at a nearly-unprecedented low of 3.6%.   And consumer spending, while moderating, has still grown during the first six months of the year.

Also, a recession is generally preceded by an “earnings recession” in the markets.  However, corporate earnings of the S&P 500 are higher today than they were on January 1st.  Friday June 10th was the midpoint of an unprecedented siege during which over 90% of S&P 500 stocks closed lower on 5 of 7 trading days.  On that day, the consensus 12-month forward earnings estimate for the S&P 500 was $239.78.  On July 14th, a month later, the consensus forward earnings estimate was essentially unchanged, at $239.50.  If we are in a recession, it may be the strangest ever.

Of course, we would likely not be talking about a recession if it weren’t for the high level of inflation we have experienced over the past several months.  The Federal Reserve set the stage for inflation by drastically increasing the money supply over the past decade or so, and sooner or later the chickens had to come home to roost.  Per its mandate, the Fed is committed to squashing inflation using all the tools at its disposal – quantitative tightening and increasing the Fed Funds rate.  The market seems confident that the approach will be successful, as CPI expectations and commodities prices have begun to come down.  Also, the dollar has strengthened against other currencies, particularly the euro, as many countries have experienced similar or higher levels of inflation.

Ultimately, the official designation of a recession is subjective and may not be all that important.  The US economy is clearly going through challenges regardless of the label.  The economy, and the stock market, will recover and continue to grow, as they always have.