How do we know if
We are in a recession?
Two straight bad quarters

National news outlets reported this week that the United States is officially in a recession.

This isn’t exactly true.

The US was in a recession between January 1 and June 30th. But that was in the past, and to quote Winnie the Pooh:

“’What day is it today?’ Asked Pooh

‘It’s today.’ Squeaked Piglet

‘My favourite day.’ Said Pooh”

Recessions and depressions both have simple definitions. A recession is two consecutive quarters of decreasing Gross Domestic Product (GDP). (Gross Domestic Product is the value of all the goods and services produced within the borders of a country.) A depression is six straight quarters of declining GDP.

Who measures the United States’ GDP? The US Bureau of Economic Analysis (BEA). It takes the BEA about 1 month to calculate the GDP for a given quarter. They tallied the numbers finalized on June 30th and on July 28th announced that for the second consecutive quarter, the GDP shrank. In quarter 1, it shrank by an annual rate of 1.6%. In quarter 2, it shrank at a rate of 0.9%.

What does this mean for you and me?

One way to think of this is by looking at one of the data points that goes into calculating GDP: real estate investments.

As interest rates have increased, loans have grown prohibitively expensive for some potential buyers. This coincides with real estate being priced at a premium. A lack of access to loans coupled with high prices equals fewer home sales which equals a hit to the GDP.

But…

Measuring the GDP shares something in common with the stunning images recently revealed from the the James Webb Telescope. In the same way the light reaching the James Webb telescope shows us a picture of something that might have happened a million or more years ago, the fine work by the good folks at BEA shows us a picture of the past.

Three examples follow of how circumstances impacting the Quarter 2 numbers have already changed:

Home prices are falling. The price of real estate is falling to meet decreased demand. It will not be surprising to see an increase in sales as a result.

Quarter 2 GDP included a decrease in the rate of goods imported into the USA. This may be a result of increased fuel costs coupled with a decrease in demand for goods as people and corporations tighten their belts amid soaring inflation and increased loan rates.

The US Dollar is currently very strong relative to foreign currencies. Not only does this make it a great time to visit Europe or other pricey international destinations, it also means there could be an increase in imports over quarter 3 due to the strong dollar being able to buy more stuff on international markets. More goods coming in means more parts to make things here in the USA, which means more products on shelves at lower prices.

Lastly, fuel prices are still higher than most people would like to see. However, here in Lexington, KY they have fallen in recent weeks by nearly 20%. Nationally, prices have fallen 7.6% in the last month. As fuel prices fall, shipping costs will also fall, stress may ease on supply chains, and we may see a reduction in inflation pressure in the US.

So far, investors have responded to the news of the recession accordingly: by largely ignoring it.

After the recession announcement, some media outlets served panic on a silver platter. Sadly, it’s the only song they know how to play. Meanwhile investors bought into the market and, as of the time of this writing, have continued to do so.

This all serves as a reminder that our economy is cyclical. The stock market has been referred to as manic depressive. When it’s in decline it feels like it will last forever. We never know when we’ll hit the bottom, and the impact on wealth – both financial and mental – can be terrible.

However, being in or near the trough of a cycle also means that the next steps are recovery and expansion. With good planning you can avoid a dangerous hit to your financial and personal well-being during an economic decline and also be prepared to enjoy the benefits of what comes next.

If you want to talk about the next steps in your financial life, we’d love to meet you. You can reach out to us here.