Many forecasts are now calling for a U.S. recession. In fact, the first and second quarter of 2022 saw negative growth in the U.S. economy of -1.6% and -0.6% respectively on the latest estimates.
Third Quarter Growth
Unfortunately third quarter doesn’t look too much better, with estimates of growth close to zero. We’ll see the first official estimate of Q3 GDP in late October.
Now, this prompts to a technical discussion of how a recession isn’t technically defined as two consecutive quarters of negative growth, but often that’s a good rule of thumb. In fact, almost all the time in recent decades, when the National Bureau of Economic Research (NBER) has announced a recession it has coincided with at least two quarters of negative economic growth. So there remains a debate as to whether the U.S. may already be in a recession, since growth numbers are negative.
The Jobs Market
The U.S. economy as a whole may be unimpressive, but what is holding up relatively well so far is the unemployment situation. The most recent unemployment report had U.S. unemployment at 3.7% for August 2022. That’s low in absolute terms.
In most recent cycles unemployment hasn’t managed to dip below 4% so we’re in a good place compared to much of recent history. Still, there is some concern even there. Unemployment has increased slightly on the most recent numbers. That can be an early warning of a recession.
Other recession warnings are flashing too. The yield curve, which has a strong track record in forecasting recessions, is now inverted. What many view as the all important relationship between 3-month and 10-year rates has not inverted yet. Still the presence of an inverted yield curve can mean a recession is likely within a year or so.
The Stock Market
Then the stock market is not showing much optimism. Of course, the stock market is volatile and reacts, and maybe overreacts, to many things, not merely the U.S. economy. Still the current bear market suggests there may be economic problems ahead.
The Federal Reserve
Policy-makers at the Federal Reserve have mixed views on the economy. With the most recent increase in interest rates, forecasts from Fed policy-makers showed many forecasting higher unemployment in 2023, and some forecasting negative growth too. That might imply some think a recession is likely.
Generally, Fed policy-makers have said in recent speeches that the current policy of raising interest rates to fight inflation makes a U.S. recession a possibility, but they won’t go as far as predicting one directly. Susan M. Collins, Chair of the Boston Federal Reserve made similar comments at her recent speech to the Boston Chamber of Commerce.
What To Expect
Economic forecasting is challenging at the best of times. However, there are clear signals that the U.S. may be facing a recession, or already in one. That said, from an investment standpoint, that’s also one reason why we’re seeing a bear market in stocks. A U.S. recession would not be a great surprise to markets, and the track record of investors trying to beat the market by calling recessions is generally poor.
However, it will be important to watch the U.S. jobs market which, so far, is holding up reasonably well. If that continues, maybe a U.S. recession may be mild, or, possibly, avoided altogether.
Secondly, the actions of the Fed in reaction to inflation are important. The Fed has raised rates aggressively, and the economic impact is felt with a lag. Further rate hikes are expected in the final two Fed meeting of 2022.
If the Fed continues to raise rates into 2023, that may make a recession more likely, though, ironically, if the Fed cuts rates in 2023 it may mean a recession is already here. Many signals suggest a U.S. recession is looming, but so far the U.S. economy, and certainly the jobs market, has held up better than many anticipated. Regardless, the U.S. economy is not showing particularly impressive or balanced growth currently and the jobs market may be the key metric buffering the U.S. economy, for now, from a broader dip in growth prospects.
Simon Moore, Senior Contributor