Gwen Guthrie Would Have a Busy Dance Card
Last week, the U.S. reported its second consecutive quarter of negative real GDP growth. Now, despite what the Biden Administration has been arguing, there is a “dictionary definition” of recession and it essentially says - 2 or more consecutive quarters of negative GDP growth. So, at least technically or according to the dictionary, the U.S. is now in a recession.
However, technicals and dictionaries aside, there is an argument, a rather strong one, in fact, to make that the U.S. economy remains on a growth path - notwithstanding the double-up on negative growth quarters.
36-years ago disco legend, Gwen Guthrie (no relation to Arlo (or Woody for that matter)), sang - Ain’t Nothin’ Goin’ On but the Rent. In this little gem, Ms. Guthrie crooned - “you got to have a J-O-B, if you want to be with me.” Now, in a sense, the U.S. economy and the need to declare a recession finds itself at a similar crossroads. If we look back historically at all the U.S. recessions since 1960, we can see a pattern (recessions in grey):
Recessions are associated with job losses and generally on a massive scale. Usually, job gains tend to get smaller ahead of the onset of recession (2020 a notable exception as the Covid shutdown blunted the usual connective tissue of most things) and then turn negative during the recession.
And here’s where 2022 is different - job gains remain not only in the black (positive for non-accountants), but also well able levels associated with even average growth.
In other words, Ms. Guthrie would have found a plethora of potential suitors in today’s U.S. economy.
Now, let’s acknowledge a couple of things:
- The post-Covid economy has been weird. Many folks have dropped out of the workforce, which has curtailed the available labor pool and thus made hiring to fill jobs especially challenging. This has even been more acute in the services side of the economy as fears over Covid and the fact that people are generally jerks (we passed on a more colorful metaphor) has weighed on the desire of folks to work in a people-facing role. Thus, while the job market remains robust and seemingly non-recessionary - employers may be less willing to lay off folks than during normal slowdowns because of the difficulty in ultimately replacing them when times are better again.
- We are in somewhat unprecedented times. The global response to Covid caused a myriad of imbalances that have since been exacerbated by the war in Ukraine. Among other things, this has led to the aforementioned worker shortage, inflation the likes of which we have not seen since the early 1980s, and an interest rate hiking campaign that has been more aggressive than any we have seen in the past three decades. In a sense, we are paying the piper for the choices that were made when Covid struck - note that this is not a judgement of those choices, but an acknowledgement that choices, no matter whether they were right or wrong, have consequences.
Thus, while the U.S. may have met the technical definition of recession, the jobs market would suggest that the economy is still on strong footing; although, this could be because of factors outside of a normally functioning economy.
Why does this matter? We acknowledge that we have spewed a lot of circular arguments to arrive at the question – why do we care? Well, as RBC WM Chief Strategist, Jim Allworth, eloquently points out – U.S. recessions matter because generally speaking, if there is not one, we tend to give equities the benefit of the doubt because stocks rarely have really bad years if the U.S. economy is not in recession.
So, where do we stand on the recession debate? Let’s first look at our Recession table:
Many of the indicators are flashing red with the very notable exception of the jobs market. We would note that the U.S. has not had a recession in the past six decades where the jobs market was strong (let alone this strong), so calling a U.S. recession a done deal (as many have) would be arguing that this time is different (which is one of the things we are taught not to say in Economics/Markets 101). Thus, while we remain very concerned about recession risks given the aggressive stance of the U.S. Federal Reserve (and other Central Bankers), we still have some optimism that the U.S. will avoid recession.