Published August 2nd 2022

Daily Brief - So, are we in a recession?

TL;DR

It’s official: last week’s data showed the US registered two consecutive quarters of negative growth. In popular telling, this means the economy has tipped into a recession. Has it really? The official determination of whether America is in recession is made by the Cambridge, Massachusetts-based National Bureau for Economic Research, and so far they aren’t calling it. Definitions aside, is the downturn here?

The economic contraction comes as the Federal Reserve tightens policy to rein in inflation. The declines in business and residential investment in particular likely reflect the impact of higher interest rates.

real gdp

While much of the first-quarter weakness was due to one-off factors (a surge in imports and a decline in the pace of inventory restocking), second quarter weakness is broader-based. The slowdowns in consumer spending, housing and business investment show the economy is clearly retrenching in the face of higher interest rates. The economy is definitely losing steam.

Feeling blue

Consumers, in particular, are feeling the pain. Evidence shows consumer sentiment is quite gloomy. A confidence measure published by the Conference Board showed that consumer confidence has fallen to its lowest since the COVID pandemic doldrums.

Another popular gauge, University of Michigan consumer sentiment, is also at levels not seen in 20+ years and far below the last three recessions.

consumer sentiment

Yes, but …

Although there is no denying the doom and gloom amongst the American public, there is a notable difference in the driver of the negative sentiment this time around. The recent sharp increase in the share who say the economy is their top issue instead reflects concerns about inflation as well as uncertainty about future growth. In contrast, previous concerns revolved around employment and the labor market.

Why are company profits still strong?

In the face of rising rates, and 40-year highs in inflation, corporate optimism may seem at odds with facts. But earnings tell a story that other data doesn’t. So far, with roughly half of earnings seasons over, there hasn’t been much evidence that the economy is entering a big crack up. Virtually no CEO talked about doing mass layoffs on earnings calls.

This is also why NBER hasn’t called it a recession. As Treasury Secretary Janet Yellen recently said, a recession consists of “substantial job losses and mass lay-offs, businesses shutting down, private-sector activity slowing considerably, family budgets under immense strain. In sum, a broad-based weakening of our economy.”

We are not there yet.

Idea Spotlight: Apple

Equity yield indicators for AAPL:NASD dropped and historically, this led to a median increase in price of 20.75% over the following 3M. TOGGLE analyzed 7 similar occasions in the past to produce the median projection and this insight received 6 out of 8 stars in our quality assessment.

After reporting record revenues last week, analysts are summing up Apple's earnings in one word - resilient.

apple price history

Daily Brief - So, are we in a recession?

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