WHAT IF WE'RE NOT IN A RECESSION?
July 27, 2022
We must be headed for a recession, right? It may feel that way if you’ve been watching or reading the news for the last several months. But what if we’re not in a recession? In this article we’ll look at what defines a recession and some of the factors that can play a role in tipping the scales.
(You can also hear our advisors tackle the topic in Episode 110 of the Mach 1 Market Moment podcast.)
WHAT'S A RECESSION?
A recession is defined as two consecutive calendar quarters with negative GDP (Gross Domestic Product) growth. GDP can be defined as the market value of all goods and services produced by a country’s economy during a specific time period.
It’s important to note when we talk about GDP and the economy that we’re not necessarily talking about the stock market. The stock market is forward-looking, meaning it’s entirely possible that by the time we realize we’re in a recession, the market may already be bouncing back.
INVERTED YIELD CURVE
So what are some indicators of a recession? One of the long-held, leading indicators is an inverted yield curve. Whenever you buy a fixed-rate investment (such as a treasury or CD), you would typically expect the longer-term investment to reward the higher interest. An inverted yield curve basically means the opposite is true and that shorter-term investments are offering higher interest rates. Historically, a yield curve that’s been inverted for at least one to two months would indicate a possible recession on the horizon. As of this writing, the curve has been inverted for a little less than one month.
EMPLOYMENT NUMBERS & CONSUMER SPENDING
Employment numbers and consumer spending can also serve as indicators of a coming recession. However, the latest report from the U.S. Bureau of Labor Statistics shows unemployment sitting at 3.6%, which is pre-Covid levels. Meanwhile, consumer spending remains strong despite 40-year-high inflation, according to the latest report from the U.S. Bureau of Economic Analysis. Neither of these statistics would currently indicate a recession.
BIRTH RATE TRENDS PLAY A ROLE
One reason we might hope for strong consumer spending to continue is the current demographics of the U.S. Around 70% of our economy is driven by consumer spending. And the typical U.S. consumer spends the most money in their lifetime between their late 40s and mid-50s. If you look at a birth rates chart, you’d see a surge starting from the early 1970s and carrying all the way through the early 1990s. If you do the math, that surge should mean plenty of Americans at peak spending age for years to come.
POSSIBILITY OF A MILD RECESSION
Even if all of the indicators don’t line up, we may still end up in a recession. But if the Federal Reserve can tame inflation and consumer spending/favorable demographics remain strong, we could be looking at just a mild recession. All of this assumes no resurgence of factors such as another pandemic or a significant world crisis like the situation in Ukraine. If these factors do not come into play, the supply chain should eventually heal and inflation should start to come down.
INCOME FIRST IN RETIREMENT
If you’re planning to retire in the next five years or so, this is your reminder to solve for income first when it comes to your planning. This means that you have enough income from guaranteed sources such as Social Security, pensions, or annuities. When the market inevitably goes through its fluctuations, this guaranteed income may alleviate worry about what the market is doing. Regardless of whether the market is good or bad, whether the administration in charge is one you like or don’t like, that fundamental rule does not change – solve for income first when planning for retirement.
The real trick in life is to turn hindsight into foresight that reveals insight.
– Robin Sharma
MAKE A PLAN AND STICK WITH IT
It’s easy to get caught up in all of the bad news you might be reading or seeing on TV. If the current market is keeping you up at night, talk with your advisor. If you don’t have an advisor, we’d love to chat with you. Stay focused and don’t get caught staring too long in the rearview mirror.
Catch the full conversation by subscribing to the Mach 1 Market Moment. We release new episodes every Tuesday.
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