A Recession or Not A Recession?  That is the question for 2022

In 2020 because of the global pandemic investors feared a global recession – a significant downturn in economic activity.  This in turn resulted in a 30% decline in the stock market.  An economic slowdown did occur including a very brief U.S. recession (2 months), but the markets rebounded quickly, and economic activity picked up at a more measured pace over the last two years.

We are once again facing fears of a recession.  Inflation over the long term has averaged about 3% per year, but over the past decade has been much lower.  It started to pick up this past year due to loose monetary policy (including stimulus checks to support the economy during the pandemic) increasing demand for goods and services, supply chain disruptions and increases in production costs.  Inflation accelerated this year with the invasion of Ukraine and resulting higher energy costs/further supply chain disruptions.  At the same time the U.S. Federal Reserve and other global central banks have been tightening monetary policy and increasing interest rates to lower inflation.  This confluence of factors is raising fear that the U.S. and other countries may enter a recessionary period.  So, let’s explore what a recession is, whether we are in one now and the possibility that we may enter one soon.

The Economic Cycle

The economy is not static.  It tends to grow over time with countries increasing their production and use of goods/services.  Growth in the economy however is not steady.  There are high growth or expansionary periods where the economy can grow rapidly.  There are other times when economic activity slows.  This may occur because growth was too rapid in the past or other factors such as major shocks to the economy (including war).  If growth slows too much there may be a contraction in the economy with lower demand for goods/services and economic growth can become negative.  Economic cycles are normal and typically are divided into four phases:

  • Expansion (Growth)
  • Peak
  • Contraction (Recession)
  • Trough

At some point we expand again from the trough and the cycle begins anew.  Recessions are to be expected periodically.  We have been fortunate that in the last 70 years there have been only 12 recessionary periods and those have been relatively brief.  The chart below from the National Bureau of Economic Research shows these periods shaded in grey.

What is a Recession?

Recession like beauty can be in the eye of the beholder.  Not everyone agrees on what they look like.  Politicians currently in control of the economy are generally biased towards claiming we are not in a recession while those who would like to take that control away are inclined to say we are in a recession. 

The National Bureau of Economic Research (NBER) founded in 1920 is a private, non-partisan organization that provides data and research on economic issues.  The NBER has a Business Cycle Dating Committee that decides when a recession has occurred. Unfortunately, the formal determination is often made after the fact.    The NBER defined a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”  It makes its determination of peaks and troughs by looking at three aspects; how deep is the decline in economic activity, how much is the decline spread across the economy and how long does the decline last. Economic activity is measured considering these factors:

  • Real (adjusted for inflation) personal income
  • Nonfarm payrolls
  • Real personal consumption
  • Real manufacturing and trade sales
  • Household employment
  • Industrial Production
  • Real gross domestic product (GDP)
  • Real gross domestic income (GDI)

All of these factors are considered not just one.  Contrary to popular belief the NBER does not simply define a recession as two consecutive quarters of a decline in real GDP.

The table below shows the length of the contractions (recessions) identified by the NBER from the figure above:

PeakTroughContraction in MonthsLength of Expansion Prior to Peak
Nov 1948Oct 10491137
July 1953May 19541045
Aug 1957Apr 1958839
Apr 1960Feb 19611024
Dec 1969Nov 197011106
Nov 1973Mar 19751636
Jan 1980July 1980658
July 1981Nov 19821612
July 1990Mar 1991892
Mar 2001Nov 20018120
Dec 2007Jun 20091873
Feb 2020Apr 20202128
Average10.3 months64.2 months

The most recent recession was in 2020 due to the pandemic.  However, it only lasted 2 months from peak to trough.  On average these recessionary periods lasted about 10 months while the expansion preceding them averaged 64 months (over 5 years).  The case of the expansionary period leading up to the short 2020 recession lasted over 10 years. 

Are we in a Recession Now?

Some market pundits have pointed to recent data showing U.S. real GDP has declined for two quarters in a row claiming we are already in recession.  However, they are ignoring other data which show strong employment (low unemployment) and high industrial production.  The graph below can be found updated periodically at Federal Reserve Economic Data | FRED | St. Louis Fed (stlouisfed.org).

Note that unemployment rose dramatically in the short 2020 recession.  Today it remains at historic lows.

Note the significant dip in industrial production during the 2008 and 2020 recessions.  Today industrial production remains high.

I will leave the official determination to the NBER, however my read of the data is that we are clearly not in a recession.  There is risk of a recession.  With continued war in Ukraine, inflation and contractionary monetary policy the data could turn very quickly and we could enter a recession.  The Federal Reserve is dancing a delicate dance in increasing interest rates to tame inflation while at the same time trying not to stifle economic activity too much leading to unemployment and other adverse consequences.  The key is for the Fed to achieve a “soft landing” from the previous high growth period.  They need to tame inflation while keeping economic growth high enough to avoid a recession.

A recent Bloomberg survey of economists revealed a view that there is about a 50% probability of a recession in the next 12 months (up from 30% from a survey the previous month).  So, we have a coin toss. If you are invested for the long term and have an asset allocation that matches your risk tolerance you can weather the storm should it arise. You should also always have a sufficient cash/money market allocation to see you through economic storms.

A Recession or Not A Recession?  That is the question for 2022
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