Recession or Nah?
The economy and markets (this week) appear to be at odds in light of recent economic data. Despite the week’s strong returns, economic data has been poor. Real GDP was -0.9% following 1Q22's -1.6% real GDP growth. Headline inflation increased to 9.1% year-over-year. The Fed raised interest rates +0.75%, keeping its foot on the pedal and pressing ahead with a fast tightening cycle. During the press conference, Fed Chair Powell gave no forward guidance and confirmed the move to a data-dependent policy trajectory. The market interpreted Powell's lack of guidance as an evolution of the Fed put – the new Fed pivot. The emerging expectation of potential rate cuts in 2023 helped fuel the market’s returns.
It’s not all bad. One aspect of the economy that is surprisingly resilient – the labor market. While initial jobless claims are rising and the pace of job gains is slowing, employers continue to add jobs at a strong pace. It's an odd signal from the business world as the Fed taps the brakes on the economy and inflation eats into consumer spending. Additionally, despite headline CPI’s increase to +9.1% year-over-year, inflation expectations sit near their 2022 lows, which could indicate a peak in inflation.
So, recession or not? There is much debate this week whether the economy is in a recession, or not. Two consecutive quarters of GDP decline is the “rule of thumb” definition, but the National Bureau of Economic Research provides the official label of a recession based on multiple economic data points. At this point, the argument goes either way and pundits will argue the side that fits their agenda.
From an investment perspective, markets have already priced in a recession so this is a nonstory. Markets tend to act in anticipation of economic data, and this year’s declines are indicative of that. Looking forward, despite dire headlines, there are signs of economic health (i.e. labor market) that call in to question the idea that markets have further to fall than they already have.
Our base case is the economy steadily weakens as 2H22 progresses, but it remains difficult to handicap the pace or depth of the slowdown. That leads to choppy trading until there is a clear trend of economic improvement. We recommend that investors remain opportunistic and patient as the economy works through its transition.
