One of the dominant talking points this year—or maybe it would be better to call it a “questioning point”—is whether the US economy is or will be in a recession at some point. The other way this comes up is when you hear people wondering if the Fed will be able to tame inflation without forcing the economy into a recession: the much-hoped-for “soft landing.”
As we have written previously, “recession” is a scary word, especially for investors who are hoping for growth in their portfolios. And it’s also difficult to precisely define when an economy enters or leaves a recession. In fact, when people talk about an economic recession, it’s hard to know who to believe. The US economy experienced negative growth for two consecutive quarters this year, Q1 and Q2, according to the US Bureau of Economic Analysis. Since one often-quoted definition of “recession” is “two consecutive quarters of negative economic growth,” that means we have already managed to survive a recession, right?
Maybe Ronald Reagan had the right idea when he said, “a recession is when someone you know is out of work; a depression is when you’re out of work.” But even from that perspective, employment and consumer spending were high during the two quarters cited above, and prices were going up. Neither of those are indicators of an economic pause.
Now we learn that the American economy’s gross domestic product (GDP) gained 2.6% in the third quarter, according to a recent release from the Bureau of Economic Analysis. This was higher than the consensus forecast of 2.3%—and since forecasters were expecting economic growth, they clearly didn’t think we were mired in a recession.
If you look at the chart of GDP going back to the Great Depression, the COVID-induced economic standstill jumps off the page, but so too does the rapid recovery, induced by the fiscal stimulus provided by the Fed, the central bank for the US. After that, the picture that emerges is growth much as it was before, albeit a bit bumpier.
The fact is that none of this means that the economy won’t experience a recessionary decline at some point in the near—or far—future. And we should also remember that the economy is inherently cylical; there is nothing wrong with periodic declines in growth. Actually, one role of a recession is to “prune” the economy by exposing unprofitable investments and forcing companies to tighten their belts and make more productive investments with their retained capital. But for now, the US economy is still experiencing increases in consumer spending, job, and wage growth. While these readings indicate that the economy is still showing strength, they have made the markets nervous because they provide reasons for the Fed to continue raising rates in order cool inflation.
So, we will continue to wait and watch to see if the Fed will be able to bring inflation back toward its 2% target—from the current 6% rate—without forcing the economy into recession.
At Empyrion Wealth Management, our sole aim to provide evidence-based guidance that is in our clients’ best interests, no matter what point in the economic cycle we’re in. To learn more about the importance of having an adviser who is a fiduciary, click here to read our white paper, “The Fiduciary Standard and the Individual Investor.”