Are we in a Recession?
You cannot turn on the television or look on your social media feed without being told, “WE ARE IN A RECESSION!”. The White House denies it, the economists debate it, the world is fearful that we have already entered into a recession.
What does it all mean for you and your money? Is it time to panic? Let’s take a minute to review the numbers. Is there anything to fear other than fear itself?
What is a Recession?
The definition that has been front and center on this debate is, “two consecutive quarters of negative GDP growth mean we are in a recession.” And as the chart below shows, we have certainly entered that period:
Although it is nothing compared to the slowdown imposed by the world’s response to the pandemic in the first and second quarters of 2020, we have certainly had two consecutive quarters of GDP decline. The first quarter of 2022 showed a slight slump of 1.6% from the previous quarter, and the second quarter shows advanced estimates of -.9% growth from the first quarter. This slowdown is definitely a classical signal that we have entered into a recession.
Does this Result in a Recession?
Although this quick measure is certainly indicative of a recession, it does not actually define one. In the United States, the National Bureau of Economic Research (NBER) officially decides if we are actually in a recession. They look at signs of sustained economic decline across many parts of the economy. They not only use GDP, but also unemployment, real income, purchasing power and many other factors. So, does the negative GDP growth mean Recession?
We are certainly living in unprecedented times, but there is certainly a precedent for two consecutive quarters of shrinking GDP that did not lead to an actual declaration of a recession.
Is there a Precedent?
In 1947, about a year and a half after the end of World War II we definitely had a period with two consecutive quarters of negative GDP growth, and we did not have a recession! (at least we never declared one) During this time, consumer spending held up because unemployment stayed extremely low (3.6%), there was actually a shortage of workers. Similar to what we see today, inflation was 8.8% that year and the GDP grew at an annualized rate of -1.1%.
I am certainly not trying to make a comparison between the horrific events of World War II and the Covid pandemic. However, from economic terms, there is a correlation. Just like World War II, there was enormous stimulus from government spending, and the growth in the money supply as well as the transition back to the old normal (or our new normal) caused high inflation. And when the war ended, just like the end of the war on COVID-19, a shift back to the old normal began.
End of our New War
Now, we find ourselves about a year and half removed from the introduction of a vaccine that marked a huge win in the COVID war. Prior to this vaccine, the economy was in shatters and real economic activity was replaced by enormous government spending. As we return to the old normal, this rapid expansion of government stimulus is working through the economy causing high inflation which at last check was 8.5% annualized. This number is certainly comparable to the situation we found 18 months after the end of World War II. So just like then, we have two consecutive quarters of negative GDP Growth, and extremely high inflation. Simultaneously, we have extremely low unemployment and a very well positioned and motivated consumer.
This isn’t the same, but it might be rhyming.
Should Investors be Fearful?
With the uncertainty in today’s market, what is the best course of action with your money? With history as our guide, and looking at what happened in August of 1947 to August of 1967, this is the right time to fear only fear. In August of 1947, the Dow Jones Industrial Average stood at 2355.10. As already mentioned, this period showed two consecutive quarters of negative GDP growth just like August of 2022. Despite inflation of 8.8%, the economy was working. The consumer was in a good position, and there were shortages of jobs evidenced by low unemployment. 20 years later in August of 1967, the Dow Jones Industrial Average was 7971.01. This represents a 338% increase. Will history repeat itself? No, but it will likely rhyme!
This is the time to be bold and remove fear. Let the Registered Investment Advisors at Dupree Financial Group, LLC help you navigate through these troubled waters.
Listen below for a lively debate on the Tom Dupree Show about the current state of the US Economy and a further discussion of the all-important question:
Are We in a Recession?