Recession?

Investment Analysis Clubs Macro Economic Trends and Risks
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All METARs know that our capitalist Macro economy is cyclical. Expansions alternate with recessions. Recessions are scary because many people lose their jobs. If people think a recession is coming (or already here) they may cut back on spending to build up an emergency fund in case of job loss. While that’s a sensible thing to do, widespread spending cutbacks can slow the economy and bring on a recession. So “declaring” a recession may become a self-fulfilling prophecy.

Similarly, investors may sell stocks to pre-empt expected price declines caused by a recession. This can worsen a market drop.

https://www.nytimes.com/2022/07/26/opinion/recession-gdp-eco…

**Recession: What Does It Mean?**
**by Paul Krugman, The New York Times, July 26, 202**

**...**
**The National Bureau of Economic Research, an independent organization that devotes much of its research to economic fluctuations began offering a chronology of business cycles in 1929.**

**Since 1978 the N.B.E.R. has had a standing group of experts called the Business Cycle Dating Committee, which decides — with a lag — when a recession began and ended based on multiple criteria, including employment, industrial production and so on. And the U.S. government accepts those rulings. So the official definition of a recession is that it is a period that the committee has declared a recession; it’s an expert judgment call, not a formula....** [end quote]

A simpler way to detect the start of a recession in real time is to look for increased unemployment. This is called the “Sahm Rule” after the economist who described it. Of course, the NBER includes unemployment as part of their model but the “Real Time Sahm Rule” chart satisfies those too impatient to wait for the NBER’s later recession call. The Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months. Remember that the unemployment rate only includes those actively looking for a job.

https://fred.stlouisfed.org/series/SAHMREALTIME

The NBER includes inventories as part of their model. The GDP shrinkage in 1Q2022 was caused by an inventory factor related to Covid-associated transportation bottlenecks. People tend to focus on a simple summary figure without wondering about the components.

It’s possible that the economy is already in a recession. It’s also possible that we are not and will not experience a recession at all. It’s too early to tell. Journalists love dramatic headlines so many will report two consecutive quarters of negative GDP growth as a RECESSION! even if the economy isn’t actually contracting. Such reporting could actually cause a recession.

I will add the Sahm Rule chart to the Control Panel.

Wendy

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So “declaring” a recession may become a self-fulfilling prophecy.

True… but on the flip side, there is at least one recession that was - by the same standards used to declare it - was actually over before it could be officially acknowledged to have begun. (Two quarters of declining GDP, followed by a quarter of increasing GDP, followed by the government finishing collecting and analyzing the data on that second quarter.)

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Recession: What Does It Mean? by Paul Krugman

I havn’t read about the “Sahm Rule” before this. I’m sure that the Federal Reserve is watching the jobs numbers closely for signs of labor slack; and this Sahm criterion must be the most important factor guiding the Fed’s idea of inflation, or I should say the Fed’s idea of what they have control over. Currently, there is a large gap between vacant positions and available workers according to the Bureau of Labor Statistics. And these vacant positions are across every sector: Construction, Manufacturing, Retail, and even the Military is not filling its quotas.
The Fed will have a long way to go with high interest rates in order to reverse the tight labor market.

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Why is a declaration of recession important?

For most of us, a slowing economy means the same cautions whether or not its an official recession. Most businesses are cautious about new ventures either way.

This seems more a matter of the way economists keep records and measure things. But of little importance to investors.

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If this was all our recession would be for the another few quarters to come, then any complaints would fail to matter. Things are okay. This is a shallow recession.

We are looking out over the edge wondering if China will cave in completely.

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https://www.reddit.com/r/InvestingCharts/comments/w6e2b4/ecr…

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Recessions usually cause stock prices and bond yields to fall. That’s often pretty important to investors.

Wendy

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Journalists love dramatic headlines so many will report two consecutive quarters of negative GDP growth as a RECESSION!

Sure they do. I must say I notice the person most using the word “recession” around here is you.

Not that there’s anything wrong with that, of course.

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Business slow downs do that too. What’s the difference?

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A “recession” is like being a woman.

You are if you want to be.

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It’s possible that the economy is already in a recession.

Oh no. Not according to Janet Yellen narrative.
https://mises.org/wire/yellen-recession-doesnt-mean-what-you…
Yellen, of course, doesn’t want that to happen, so she has been insisting that “what a recession really means is a broad-based contraction in the economy, and even if that [second-quarter GDP] number is negative, we are not in a recession now. I would warn that we should be not characterizing that as a recession.”

Move along folks nothing to see here.

I don’t see why we listen to Krugman.
He predicted a global recession in 2016 due to the election of a certain politician.
https://www.politico.com/story/2016/11/krugman-trump-global-…

And Krugman was wrong about inflation in defending the $1.9 trillion American Rescue Plan Act.
https://www.nationandstate.com/2022/07/24/paul-krugman-confe…

Krugman may once have been an economist but now is a political hack spouting support for his favored political party. IMO any further reference to Paul Krugman should be considered a political post.

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A “recession” is like being a woman.

You are if you want to be.

LOL! I almost fell out of my chair laughing at this post. Good one ajaskey!

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No. of Recommendations: 5

Recessions usually cause stock prices and bond yields to fall. That’s often pretty important to investors.

Wendy


The big question in The Intelligent Investor was how to be in right relationship with the markets?
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Not sure if the links will work here. Let’s try.

The 10yr - 2yr bond is inverted. Smells like teen spirit too me.

https://schrts.co/aZIywTTB

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Oh no. Not according to Janet Yellen narrative.
https://mises.org/wire/yellen-recession-doesnt-mean-what-you……
Yellen, of course, doesn’t want that to happen, so she has been insisting that “what a recession really means is a broad-based contraction in the economy, and even if that [second-quarter GDP] number is negative, we are not in a recession now. I would warn that we should be not characterizing that as a recession.”

Stuff like this reminds me of the Abe Lincoln riddle. How many legs does a dog have if you call his tail a leg? Four. Saying a tail is a leg doesn’t make it a leg.

JLC

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