Recession Watch

Market Minute

August 2022 – By Scott Rosenquist, CFA®

Economic data released last week by the Bureau of Economic Analysis (BEA) showed the U.S. economy shrank by an .90% annualized rate in the second quarter.  This follows the 1.6% decline in the first quarter.  While two back-to-back negative reports can be commonly viewed as a recession, it does raise the question what exactly is a recession? I expect this topic to be front and center as additional economic data covering employment, consumption and industrial activity will be heavily scrutinized.  GDP reports are subject to revision by the BEA in the following months.

The National Bureau of Economic Research (NBER) makes the decision on business cycle dating, in other words calling recessions.  The NBER defines a recession more broadly than just two negative quarters of GDP and considers the depth, diffusion, and duration of broad economic data in their decisions. In their interpretation, a recession is a significant long-lasting decline in economic activity that is widespread across the economy. Regarding the pandemic, the NBER states that while the downturn was brief, it was so widespread and deep that it warranted to be classified as a recession.  This overall process is backwards looking and typically calls a recession once it has already started or even not until it has ended.  This does little to help investors navigate the financial markets.

Recessions are a normal part of the economic cycle.  The previous two recessions were unusual.  The pandemic was a steep decline that was brief while the Great Financial Crisis was deep and longer lasting. Those are not your typical recessions based on historical data. The economy added over three million jobs to start this year which is at odds with what happens during an economic slowdown.   The Federal Reserve is slowing the economy by design with consecutive interest rate hikes to tamp down demand and bring inflation down.  Given the strength of the labor market, the Fed will continue down that path of restricting economic conditions.  The debate on recession or not is more academic and now political but the economy will continue to slow as rate hikes seep into the economy.

 For investors, timing economic cycles and the always pending downturn is difficult.  As we’ve mentioned in the past, timing the market is difficult to do over any period of time and the long-term ramifications of being out of the market can significantly impact long term financial goals. The markets highest and lowest return days tend to be clustered close to each other.  A proper asset allocation depending on one’s time horizon and risk tolerance tends to provide a better outcome as the time horizon increases.

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