Updated: Jul 31, 2022
The definition of a recession as two consecutive quarters of negative growth is flawed
If you have heard that the US is now in recession, it's not. The reason you may have heard or read that the US is in recession is because yesterday's initial estimate of second quarter real GDP growth showed a second consecutive quarterly decline. This, according to some, is the definition of a recession.
Such a definition is deeply flawed. Negative real GDP growth can be mild, can be due to factors such as inventory de-stocking which would not necessarily reflect demand weakness, and, as is currently the case, is not necessarily accompanied by rising unemployment or falling consumer spending.
But the official NBER definitions are also imperfect. It deemed the 1973-75 recession as having started in November 1973 when unemployment started to rise. However, unemployment only rose gradually from this point, and only started to skyrocket from mid-1974 onwards - it rose from 5.1pct in May 1974 to 9.0pct in May 1975. Moreover, the US equity market only began to fall significantly from February 1974 when it became apparent that the gradual rise in unemployment was going to turn into something nastier.
My point is, do not be fooled by the equity market's response to yesterday's initial GDP estimate. I think the worst is yet to come, as was the case in late 1973. Consumer spending tends to be resilient, up to the point when it isn't. It will likely hit a tipping point in the next few months at which credit cards have been maxed out and real wage growth has been negative for too long.
Also, Jerome Powell's remarks this week appear to have been interpreted by equity markets to mean that the end of the interest hiking cycle is within sight and thus that we may be past the worst on the economic front. Again, I think this interpretation is wrong. Indeed, it is possible that Powell has become aware of the effect recent interest rates are having and that...the worst is yet to come.
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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