Many forecasts now call for a recession in the United States. In fact, the first and second quarters of 2022 saw negative growth in the US economy at -1.6% and -0.6% respectively according to the latest estimates.
third quarter growth
Unfortunately, the third quarter doesn’t look much better, with growth estimates close to zero. We’ll see the first official estimate of third-quarter GDP in late October.
Now, this prompts a technical discussion about how a recession is not technically defined as two consecutive quarters of negative growth, but that’s often a good rule of thumb. In fact, at nearly all the times in recent decades, when the National Bureau of Economic Research (NBER) announced a recession has coincided with at least two quarters of negative economic growth. So there is still debate about whether the US may actually be in a recession, as the growth numbers are negative.
The US economy as a whole may be unimpressive, but what’s standing relatively well so far is the unemployment situation. The latest unemployment report recorded the unemployment rate in the United States at 3.7% for the month of August 2022. This is low in absolute terms.
In most recent cycles, unemployment hasn’t been able to drop below 4%, so we’re in a good position compared to a lot of recent history. However, there is some concern even there. The unemployment rate has increased slightly compared to the latest figures. That could be an early warning of a recession.
Other warnings of a recession are flashing, too. The yield curve, which has a proven track record of predicting recessions, has now been inverted. What many see as the significant relationship between 3-month and 10-year rates has yet to be overturned. Having an inverted yield curve still means a recession is likely within a year or so.
Hence the stock market is not showing much optimism. Of course, the stock market is volatile and reacts, and perhaps overreacts, to many things, not just the US economy. The current bear market still indicates that there may be economic problems ahead.
Federal Reserve policy makers have divergent views on the economy. With the latest rate hike, forecasts from federal policy makers have shown that many expect higher unemployment in 2023, and some are forecasting negative growth as well. This may mean that some think a recession is a possibility.
Overall, Fed policymakers have said in their recent speeches that the current policy of raising interest rates to fight inflation is making a US recession a possibility, but they will not go so far as to forecast outright. Susan M. Collins, president of the Boston Federal Reserve, made similar comments in her recent address to the Boston Chamber of Commerce.
what are you expecting
Economic forecasting is difficult at the best of times. However, there are clear signs that the US may be facing a recession, or is already in a recession. However, from an investment point of view, this is also one of the reasons why we see a bear market in stocks. A recession in the US wouldn't be a huge surprise to the markets, and the track record of investors trying to beat the market by describing recessions is generally poor.
However, it will be important to keep an eye on the US job market, which, so far, has been reasonably resilient. If this continues, the recession in the US may be mild, or it may be avoided altogether.
Second, the Fed's actions in response to inflation matter. The Fed raised interest rates significantly, and the economic impact was being felt by the delay. Interest rates are expected to be raised at the last two Fed meetings of 2022.
If the Fed continues to raise rates until 2023, it could increase the likelihood of a recession, however, ironically, if the Fed cuts rates in 2023, it could mean that a recession has already begun. Many signs indicate that a US recession is looming, but so far, the US economy, and certainly the job market, has held up better than many expected. Regardless, the US economy is not showing impressive or balanced growth at the moment, and the labor market may be the main barometer protecting the US economy, for the time being, from a broader downturn in growth expectations.