Are we in a recession?

Are we in a recession?

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The experts disagree. Who knows?

But why does it matter? The economy is slowing. The net result is the same whether or not its officially a recession.

The snarky answer is it depends on what political persuasion you are. Conservatives are quick to call this the Biden Recession, ignoring the myriad of factors that led to a perfect storm of inflationary pressure (including the stimulus payments they supported at the time that probably staved off a pandemic-created depression).

On the other hand, Democrats point the finger at everyone except their own failure to anticipate the stickiness of the inflationary pressures, from the demand bounce after consumers decided the pandemic was over (it isn’t) to supply chain issues to energy costs to the Russian invasion. There are a host of contributing factors to record inflation, and those who constantly pat themselves on the back for repeatedly claiming the sky is falling could no more predict this than Madam Leota.

The irony is that what it will take to bring inflation down is the one thing that nobody wants to see. Americans (this is a global problem, BTW, and much worse overseas) need to stop spending. They need to let the supply chain even out but instead drive up prices by continuing to buy things.

It is important to understand that inflation does not drive up prices. Inflation is the result of prices being driven up. From an economic theory perspective, inflation is the measure of price increases across the economy driven by increased demand and slower supply. When there is more demand than supply, the costs of goods goes up. It’s economics 101. When there’s less demand and too much supply, costs of goods goes down.

Critics of the stimulus payment say that Americans had too much money stuffed into their pockets during the pandemic. They gloss over the fact that unemployment was at record highs and that supply chains were broken as factories around the world shut down and workers were forced to home isolate (those masses who did not have jobs where they could Zoom in for remote work). Had the bipartisan stimulus payments (two under President Trump and one under President Biden) not been approved, prognosticators predicted mass defaults on loans, homelessness, families unable to afford food, etc.

The majority of those stimulus, as well as enhanced unemployment payments, went to keeping the rental mortgage industry alive, meaning it went to the banks. Even the PPP loans for small businesses were a financial boon to financial institutions who skimmed generous administrative fees off the top. For those still employed, much of the stimulus went into savings. For those out of work, it went into survival. Without the programs, most economics think we would have experienced at least a recession in 2020 and possibly a depression.

What was expected was that state leaders would follow CDC guidance and work to stop the spread of COVID. But as is typical in this country, there were divisions in the approach to the pandemic, with some states boasting they allowed businesses to restart the economy even as death rates were rising. They encouraged citizens to return to restaurants and avoid wearing masks and spend lots of money.

This created a false sense of security that, while driving a stock market recovery in the latter half of 2020, left Americans largely exposed to first the Delta and then the Omicron variant waves that ruthlessly attacked those who let it in (and even many who took precautions to keep it out).

This led to uneven productivity as employees unexpectedly were pulled out of the labor force to recover from COVID. Vaccines lowered the death rate, but didn’t stop business interruptions, leaving especially the service industry consistently short of employees. The cessation of enhanced unemployment was supposed to drive more people back to work but this did not happen, creating the illusion of full employment at the same time help wanted signs were in every window.

Retailers, stung by an ability to meet demand in 2020, overstocked in 2021, leading to a further imbalance between supply and demand. So they slammed on the breaks in 2022, further misreading consumer sentiment and further exacerbating the problem. They over-hired, raising salaries and benefits to attract employees and were unprepared when the irrationally exuberant economic conditions faltered.

Businesses also started playing with a concept called shrinkflation. Party to control costs for consumers and largely to protect profits for executives, manufactures of food and consumer products avoided price increases by reducing the size of the products they sold. Consumers received less value for the cost they paid, but they didn’t have to pay higher prices for the products they bought. It’s sneaky and companies depend on consumers not realizing what is happening. Ultimately, it forces consumers back to the store more often for staples that don’t last as long, which drives up profits and further empties wallets.

Then there’s Russia. Putin’s invasion of Ukraine sent oil and energy prices soaring as sanctions against Russian oil radically reduced global market supply. This was further aggravated by Russia’s reduction of oil and gas into Europe in a retaliatory attempt to force Europe into abandoning its new found principled backbone.

The Russian invasion also impacted Ukraine’s global grain export business as ports were blocked along the southern coast of the country. Ukraine is a major grain exporter to the world, and Russia’s actions impacted food prices globally, leveling a one-two punch to the world of high energy and high food costs.

It is important to understand that the world exists in a global economy, and much of what contributes to inflation is not under the control of individual nations. Whether it be supply chain and manufacturing, global energy markets, or international food production, all nations are connected whether they want to be or not. The world has simply become too populous for any one country to be self-sustaining or self-contained.

Many believe that given high rates of inflation, we must be in a recession, but that’s not how a recession is defined. Others believe that the bear market investors have been suffering through is a clear indication of a recession, yet that also is not how a recession is defined. And detractors point to low employment as proof that we could not possibly be in a recession, but that too does not negate a recession.

A popular definition of a recession is 2 consecutive quarters of decline in GDP. That’s not how the National Bureau of Economic Research (NBER) defines it, and they are the group of 8 economists officially charged with declaring a recession. For NBER, a recession is an economic contraction starting at the peak of the expansion that preceded it and ending at the low point of the ensuring downturn. The thing is, a recession can technically only be recognized in hindsight.

NBER considers a number of economic indicators in making its determination, and GDP, inflation and unemployment are only a few of the signs they monitor. The recent quarterly GDP numbers would seem to indicate a second quarter of a contracting economy, but GDP is a measure that enjoys two subsequent adjustments (in the intervening months between quarters). The negative growth of the economy this past quarter is slow slight that GDP could easily be revised into a positive territory. It could also be revised downward, cementing the recession label.

Then there’s the Fed. The fed’s job is to stop the growth of inflation while preventing the country from sliding into a recession. It’s like walking a tightrope on a razor blade. Raising rates causes financial institutions to increase the costs of borrowing and the benefits of saving more appetizing. This ideally will lead to a reduction in spending (demand), allowing supply to catch up. This in turn would bring inflation down.

But if businesses react with mass layoffs as they look to contain costs and placate shareholders, they risk driving up unemployment and contributing to a reduction in GDP, further leading to the possibility of a recession. So the Fed tries to delicately the only real tool it has to temper inflation while avoiding a recession. The catch is we will only know if it fails after we are already in a recession.

In fact, there is very little the federal government can do to control inflation or prevent a recession. The same policies that provide relief - making the costs of food, travel, borrowing, etc. cheaper risks increasing demand and, without a change in supply, actually driving up inflation instead of bringing it down.

Even steps taken to reduce the price of gasoline at the pump - tapping the nation’s emergency supply, eliminating gas taxes (in some states, a dead-on-arrival proposal at in Congress) runs the risk of leading consumers to increase consumption rather than softening the pain of necessary fueling.

But gas prices are coming down, and hopefully food prices will soon follow. But it will be slow and gradual process and consumers are much less likely to notice any decline in prices than they were to see their increase.

This is not my first recession, or yours. There was actually a technical pandemic recession in 2020, but it was so short-lived, lasting only 2 months. The Great Recession of 2007 lasted longer but for many, it’s already a distant memory. In fact, there have been 50 recorded recessions in the history of the USA, not including whether we are or are not currently in one, most averaging around 1 year or so. If so, it would be the 4th recession in the last two decades alone.

And yet, we have repeatedly survived. Both personally and economically. For whatever reason, those predicting that the sky is falling want you to be fearful of their predictions of doom. I’ve lived through 8 recessions in my lifetime, and none of them have been life threatening. Yes, there’s been hardship and anxiety, but none of them have stopped me from achieving my personal, professional or financial goals.

So, are we in a recession?

I go back to it depends on who you ask. Those in power want you to see hope and a light at the end of the tunnel. Those seeking power want you to seek the darkness with no hope for dawn until those in power are thrown out. They don’t necessarily have a better plan to turn the economy around, but that’s not really their priority.

In truth, it will depend on American consumers themselves by tightening their belts and cutting back on unnecessary spending. It’s going to depend on companies making business decisions that are in the best interests of customers and employees as well as investors. And it is going to require patience and tolerance on the part of everyone. And that may be the hardest thing to achieve.

Fuskie
Who notes he is not an economist and is admittedly an optimist, but mostly he’s a realist, not prone to emotional reactions or hysterical crowd-following, and hopes this overblown response to your simple but loaded question has been useful…


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Are we in a recession?

The National Bureau of Economic Research (NBER) might be able to provide an answer in 6 months.

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If you are a member of a Motley Fool service, I recommend watching today’s Morning Show. Somewhere in the middle this is discussed. Their conclusion was that “if” we are in a recession, it is a very mild one.

As someone else commented, the official answer is one that is disclosed far after the fact based on analyzing the numbers.

Vicki

I am a StockAdvisor subscriber, but I can’t seem to find the link to the Morning Show. I’ll keep looking. Thanks for all of your replies.

Yes, Virginia, we are in a recession.

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LisaM, select Motley Fool Live from your My Fool menu. Under the Category section of the Search Video Library panel, select The Morning Show and click Search. Expect today’s show to be posted a little later today.

Fuskie
Who notes MFL also publishes highlight clips for conversations on the show that stand out…


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Fuskie, great post. I have to ask a question, completely serious one: is all that off the top of your head? Presumably it is, but I have to ask. Very impressive presentation; you are indeed a polymath.

I will say this about inflation versus deflation: to me, inflation is, in my opinion, something we, and the government/fed can deal with…but I remember a teaching saying - and it is something I understood later on - deflation is what one doesn’t want; deflation is more frightening. He never said the reason, but I worked it out to mean that deflation is something you really can’t do anything about - how do you convince people to buy? You can convince them not to buy, easily; but buy if there is a confidence crisis…I have no idea.

I agree, too, with the sentiment expressed in another post - we are in a recession. Fuskie is correct that it is only known in hindsight, and I could be wrong, this is just an opinion - but one assumes we have to be in one, especially if you go by the peak-trough definition. I think the volatile markets will be with us for a while - I’m sure all of us here knew the market would be up once the raise was announced mid-week, but I think all of us know too that this isn’t over. It was a good week, but I anticipate further selling and new lows. And honestly, I bought today, and hope to next week again. (In fact, I bought a few times this week…some DIS, some O, some SHOP, etc.). As the Fool says, this is an exciting time. Wish I was younger. Anyone who is young should be having a field day right now. Seriously…what great prices on some of these tech stocks…and absolutely, trade the volatility too, have some fun, learn, make money with a risk portfolio, do some swing-trading.

The faux economics lecture? Yeah, that was off the top of my head. I looked some of the details up on Google but for the most part, it’s my understanding of where we are and how we got there.

After posting, I realized I left some stuff out. For example, companies who raised the minimum wage and improved benefits offered to lure employees back into the workforce created a class of Americans with as much if not more newfound disposable cash than the stimulus payments provided. Even now, especially in the service industry, employers are looking for help and offering higher starting wages than they did pre-pandemic. More money in your pocket turns into higher spending, which contributes to inflation.

As I noted, there are so many contributors to inflation but the federal government only has one real tool to combat it, and that tool is not wielded by the President but by the Fed, a non-partisan quasi-independent organization who guessed wrong. In their defense, things happened (Putin) that you could not have anticipated, but there were other things that in hindsight they should have considered possible.

Other than inflation and the GDP, there are none of the regular signs of inflation. Consumers are still spending, employers are still hiring, Those signals may change but they may not. We are not overemployed and while consumers may complain about the prices, that’s not stopping them from spending.

Ideally, capitalist economic theory says spending will come down, supply will rise to meet demand and inflation will dissipate. But in an election season, it’s not that easy. The possibility of a recession is swung like a blame club.

I’ll also point out that the stock market is predictive of the future only in that it expresses the worries of the present. Worried inflation will stay high, bid the market down. Optimistic the Fed rate increases will lead to a soft landing, bid the market up. It’s all short-term thinking.

Fuskie
Who wishes he were younger as well but wishes he could take the experience and bank account values back with him…


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Fuskie,

Thank you for that very good review of the last few years. There are a few points with which I’d disagree if this were a forum to discuss politics, society, etc., but it’s not so I won’t. None of the following ramble is a criticism of you or what you said.

You make one great point that almost no one in the public discourse will: without the massive and perhaps overdone USG cash helicopter drop, there would have been widespread misery & the recovery from that would take years. But people - maybe the majority - are not reasonable.

When the government takes steps to prevent or ameliorate something awful and it more or less works (deep recession avoided, COVID contained), people will feel that those steps were unnecessary or that the awful thing was never going to happen anyway.

There is also an unstated assumption in the political criticism of the USG & the Fed that the “right thing” to do was knowable & doable. That’s not realistic.

Since I graduated high school in 1973, the price of gas has been a major political factor. Oil is a world commodity, but ever since then politicians of every persuasion talk as if the price of gas is something within the control of the USG. Thus, voters believe the same & get angry when King Canute cannot turn back the tide. Almost 50 years of this and people still don’t get it.

Similarly, inflation right now is a worldwide event. It was not caused by the one or two things that the talking head said it was and it won’t be reduced by whatever the same talking head is advocating. [NB - But then again, it might. Nobody knows for sure.]

Thanks again, Fuskie. I always enjoy reading your posts.

MJ

The hardest thing of all to see is what is really there - J.A. Baker, The Peregrine.

You make one great point that almost no one in the public discourse will: without the massive and perhaps overdone USG cash helicopter drop, there would have been widespread misery & the recovery from that would take years.

It is very difficult to prove a negative, and subsequently, it is very difficult to prove what might have happened. All I would say is that three rounds of public stimulus, as well as the programs to prop up businesses, supplement unemployment and ease rental payments all received bipartisan support at the time, and most were enacted during the previous administration. You can argue whether they did too much or too little at the time, but what they did, they did together.

I do think the Fed, the only organization actually responsible for identifying and mediating inflationary trends, dropped the ball. But I was right with them a year ago thinking that supply chain issues would be resolved as the world got vaccinated and logistic logjams were exhausted. But the initial hopes for the vaccine did not pan out, a combination of a refusal by half the country to get vaccinated, and the reality that while helping prevent death and serious illness, they did not substantially stop the spread.

And while some may dismiss getting sick as no big deal anymore, certainly not worth masking, physically distancing, or gathering in mass indoors, I can personally attest that C19 cost me over $2k and 14 days I’ll never get back. And that was after being twice boosted. I can only imagine the personal and financial cost had I not been as prepared and taken as many precautions as I did and continue to do.

But back to the Fed, I think it was a combination of expectations that more would embrace vaccination and common sense health safety protocols, that businesses would figure out their new normal and return to reliable (and more predictable) business operations, compounded by the impact of the Russian war of aggression against Ukraine, that formed a perfect storm to drive inflation through the roof.

Still, however, we have short memories. During the energy crisis in 1976, gas experienced a 6.86% inflation rate. My 30-year fixed 1995 mortgage rate was 5.25%. And I had an auto loan at 4%. I keep reading how this inflation is the worst ever and I just have to wonder how young those who are saying that really are. Or is it just selective memory or the need for click-bait headlines that dooms us to forget the past and repeat past mistakes.

We are also a self-centered nation. I guess all nations are, but as bad as gas and food prices are here in the US, as you noted, they are far worse over in Europe and anywhere else that was dependent on Ukrainian grain or Russian oil. These are global markets and when you suppress one contributor to the market, there is tremendous for the others to fill the gap and that means inflation until supply can rise to meet demand. Because don’t dare suggest anyone reduce their demand.

Fuskie
Who continues to believe optimistically that the night always seems darker before the dawn and his Urologist father would tell his kidney stone patients, this too shall pass…


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