Recession or No Recession? The Answer Is Actually Simpler Than You Think
Recession: that word has been on everyone’s mind the past few months. It’s been in even more headlines ever since news of the latest quarter GDP numbers have hit. This has led some to panic and some to become confused. Hopefully in the next few paragraphs there will be more clarity as to what is happening and what it means.
First, we will start with the facts. In the 1st Quarter of 2022, the GDP decreased by 1.6%. In the 2nd quarter of 2022, the GDP decreased again, this time by 0.9%. Why does this matter? Because a decrease in GDP signifies a shrinking of the economy. Some people have mistaken that negative GDP indicates a “slowing” of the economy, but that is not the case. The economy is shrinking if its growth falls from 2.3% to 1.5%. Any positive number indicates growth, and any negative number indicates a shrinking economy.
So no, two consecutive quarters of negative GDP growth is in no way a good sign, nor should it be ignored or belittled. It is bad news, through and through.
Now we come to the dreaded word: recession. A recession is a point in the business cycle when the economy shrinks, which is indicated by two consecutive quarters of negative GDP growth. That’s the definition. It’s been that way for the past 40-50 years. And it has been undisputed up until the past week. No matter what people say: that defines a recession.
Are the other factors to consider? Absolutely. Many have pointed to the labor market and low unemployment as reasons to argue that the economy is not in recession. It is true that unemployment has remained low, which is a good thing, but there are many other factors of the economy that are not quite as rosy. First, inflation has continued to rise. The word “transitory” that we heard so often last summer in regard to inflation has become a fairy-tale, as inflation year to year has remained close to 9% for the past 12 months. Second, while unemployment has remained low, the labor force has not quite returned to its pre-pandemic levels. In fact, there are close to 2 million people less in the labor force than there were before the pandemic (KansasCityFed). The unemployment rate does not factor in the number of people who are no longer looking for jobs, and the 2 million less people in the labor force has contributed to the low 3.6% unemployment rate.
So yes, it is clear the US economy is in a recession. That is definite. One does not get to change the definition because one does not like the results. You don’t add extra time in the fourth quarter of a basketball game. We have had back-to-back quarters of negative GDP growth. That is a clear indicator of recession.
However, that does not mean it is time to press the big red panic button and hide in your closet either. In fact, the stock market has actually risen since the release of the second quarter GDP numbers. That does not mean recession is a good thing—it’s not, but it means that it wasn’t all that unexpected. Reacting in pure panic by removing all your money from the stock market is far from a smart idea. Like we have repeated time and time again when it comes to times of uncertainty, it is important to evaluate where you are financially and adjust accordingly.
