The Economy Is Growing but So Is the Risk of a Recession October 2022
It Must Look Like a Duck and Quack Like a Duck to Be a Duck
The news seems to focus on the risks of the economy being in a recession or soon to enter a recession. This can be seen in the number of people asking that question to Google, which has skyrocketed (chart one).
It is higher now than in the past two recessions, but in the past two, it was pretty obvious since there were massive increases in the unemployment rate. This time is more confusing since the unemployment rate is falling.
It is not officially known whether the economy is in a recession or not. The National Bureau of Economic Research (NBER) is the self-appointed arbiter of the American business cycle and has been dating recessions for almost a century. They are precise with the start and end dates of a recession, but they are not timely when announcing when they happen. They need to wait for the release of economic reports and revisions before making a decision. They take a deliberate retrospective approach, so they do not have to revise. Since 1980, there has been an average of 7.2 months from the start of a recession to the NBER announcement (chart two).
The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months. It is usually visible in real GDP, real income, employment, industrial production and wholesale-retail sales. Three of the six indicators they follow are directly related to the labor market. The others deal with income, spending and manufacturing. For the past three months, five of these six indicators have been in positive territory (chart three).
So although many may think the economy is in a recession, it probably is not now. That said, the pace of growth of these indicators has been slowing. But slowing is not contracting. The important question is where the economy is headed. Is it transitioning to a slower, more sustainable pace or to a contraction? Complicating the outlook is the Fed, which is firmly committed to reducing the high pace of inflation by raising interest rates by another 100 basis points (bps) by yearend. This will put the funds rate above the neutral level and well into the restrictive territory (chart four).
With the Fed actively trying to slow the pace of economic growth, the path to a soft landing is becoming narrower, and the risk of a recession continues to grow.
The risk of a recession depends on how active the Fed will be in reining in inflation. Inflation may have peaked in June, when the consumer price index hit 9.1%. Future reports are expected to show inflation is moving downward in the direction the Fed wants. But will the decline, if it happens, be fast enough for the Fed, or will they have to increase the pace of interest rates, which increases the risk of entering a recession? More data needs to be released to get a better understanding.
MARKET TRENDS
US equities have staged a strong rally over the past two months, aided by declining commodity prices, easing inflation expectations and lower bond yields. However, bear market rallies are common historically, and major bottoms tend to see a retest of previous lows. With continued strength in job gains suggesting the Fed will have to stay aggressive in its fight against inflation, recent market momentum might be difficult to sustain, and investors should brace themselves for renewed volatility in the months ahead.
LABOR
Labor demands are intense, with wage growth increasing 5.2% year over year, twice as fast as the pre-pandemic average.1
THE FED
The strong wage growth worries the Fed, which views it as a significant risk to reducing inflation.2
HOUSING
The increasing mortgage rates have slowed the pace of existing home sales, which have fallen for five straight months.3
CONSUMER SPENDING
Personal spending rebounded in June following a slowdown in the spring. Summer spending should be more robust due to solid travel activity.4
INFLATION
Inflation has eased off its 40- year high as a significant drop in gasoline prices has helped bring the annual rate down to 8.5%.1
OIL
Oil and gasoline prices have been falling since hitting a peak in mid-June; gasoline prices have dropped 96 cents (19.1%).5
Sources
1. Bureau of Labor Statistics
2. The Federal Reserve
3. National Association of Realtors
4. Bureau of Economic Analysis, CNR Research
5. Bloomberg
Index Definitions
CPI: The Consumer Price Index (CPI) is a measure that e xamines the weighted average of prices of a bask et of consumer goods and services, such as transportation, food and medical care.
Important Disclosures
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.
Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Readers are cautioned that such forward-looking statements are not a guarantee of future results, involve risks and uncertainties, and actual results may differ materially from those statement. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.
Past performance or performance based upon assumptions is no guarantee of future results.
Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.
Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change. All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
This material is available to advisory and sub-advised clients, as well as financial professionals working with City National Rochdale, a registered investment adviser and a wholly-owned subsidiary of City National Bank. City National Bank provides investment management services through its sub-advisory relationship with City National Rochdale.
Investing in international markets carries risks, such as currency fluctuation, regulatory risks, and economic and polit-ical instability.
Investing involves risk, including the loss of principal.
As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Past performance is no guarantee of future performance.
As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Past performance is no guarantee of future performance.
Non-deposit investment products are not FDIC insured, are not bank guaranteed, and may lose value.
Stay Informed.
Get our Insights delivered straight to your inbox.
Explore More
Put our insights to work for you.
If you have a client with more than $1 million in investable assets and want to find out about the benefits of our intelligently personalized portfolio management, speak with an investment consultant near you today.
If you’re a high-net-worth client who's interested in adding an experienced investment manager to your financial team, learn more about working with us here.
Top