Last week, GDP numbers came in for Q2, and they…don’t look great.
The U.S. economy unexpectedly shrank for a second quarter in a row this year, according to data released Thursday.GDP Flashes Recession Warning Sign, Forbes.com
The US has now experienced negative GDP growth for 2 consecutive quarters, and that’s the commonly accepted definition of a recession. So…the US is now in a recession, right?
Surprisingly, the answer is not so clear cut, and there’s plenty of disagreement about whether this is a “real” recession or not, with economists, financial analysts and (of course) politicians weighing in on both side of the debate.
But first, the good news. Gas prices across the country are falling, in some cases by quite a lot.
Prices at the pump continue to sink, providing relief to inflation-weary consumers and an economy mired in a slowdown.Here’s why gas prices are sinking, CNN.com
So we know that rising interest rates is having its desired effect. Gas prices are continuing to come down from their nosebleed levels of $5 a gallon, and in many states are now sitting below $4 a gallon. And because energy prices have a downstream effect on everything else we buy, lower gas prices will trickle down into the rest of the economy as time goes on.
But as we’ve seen, higher interest rates don’t come for free. The big question that’s going to plague 2022 (and possibly part of 2023) is whether the economic damage from cooling down inflation will be worth it. Depending on who you ask, the damage has already been done and the US is already in a technical recession, while others are saying “not so fast” because GDP numbers alone don’t tell the whole story.
Which is correct? Let’s dig into the data to find out.
It Sucks in the Tech Sector Right Now
Before we get into the question of whether the US economy as a whole is in a recession, one area that is exhibiting all the signs of a classic recession is our old stomping grounds, the tech sector.
Hearing from my old friends and colleagues, we keep getting the same message over and over again: The tech sector is in trouble.
Just months after cutting 9% of its workforce, Robinhood on Tuesday announced plans to lay off another 23%.Robinhood to cut 23% of its workforce, revenue sinks 44%, CNN.com
Hit by subscriber losses for the first time as well as plunging stock prices, Netflix has laid off about 475 staffers in the past three months.Netflix Layoffs Cost Streamer $70M In Severance Charges; Nearly 500 Staffers Axed Recently, Deadline.com
Amazon shrank its staff by 100,000 last quarter, joining the ranks of Netflix and Google in an industry-wide adjustment to reduced profits, heightened inflation, and unprecedented pandemic growthAmazon’s 100,000 job cuts reflect industry-wide adjustments to economic uncertainty, InsiderIntelligence.com
The pink slips are coming fast, furious, and from all directions. Even in companies not actively laying anyone off, hiring freezes and reneged offers are rampant, and there appears to be nowhere to hide.
The culprit is, of course, the pandemic. During the worst of COVID-19 when all the shops were closed, the tech sector was the only part of the economy expanding. It was a combination of tech being naturally compatible with working from home and everyone collectively being trapped inside their homes with nothing to do but binge-watch Netflix, order crap we don’t need from Amazon, and trade meme stocks on Robinhood.
All those companies hired like crazy to keep up with surging demand, and now that we can go outside and talk to people again, we’re cancelling our Netflix subscriptions.
The pandemic, it seems, comes for everyone eventually. Tech escaped the worst of its impacts for the first two years, but now it’s their turn on the shit list, unfortunately.
To all my colleagues in the tech sector, stay strong. This isn’t the first downturn in tech, it won’t be the last, but as long as smart phones continue to play such a central role in our lives, the sector will always bounce back.
Digging into the Numbers
Tech notwithstanding, the question of whether the broader US economy is in a recession basically boils down to three economic indicators.
The first is, of course, those two consecutive quarters of GDP contraction. A straightforward interpretation of the reports suggest that this is pretty obvious. There are two negative numbers over the past two quarters, so we’re therefore in a recession.
But remember the very real concerns we had about the Q1 GDP number. As I talked about in a previous article, the Q1 GDP number was obscured by the fact that the US imported a lot of stuff that quarter. The US typically operates on a trade surplus, meaning that they sell more stuff than they buy. This got flipped upside down in Q1 2022, with the US importing more than they exported, caused by US consumer demand rebounding but before the domestic manufacturing sector had caught up yet.
As a result, the US bought a ton of stuff from other countries to make up for the lack of domestic supply, and because of how GDP numbers are calculated, this created a one-off negative drop in the GDP. In fact, if that burst of importing hadn’t happened, the economy would have grown by 1.8%! So do we really have two consecutive quarters of negative GDP growth, or was that first one a fake-out?
The second factor that everyone’s scratching their head over is corporate profitability. Normally in a recession, companies make less money, but in this case the opposite is happening. Companies are making more money than ever!
More than halfway into the second-quarter reporting period, S&P 500 company earnings are estimated to have increased 8.1% over the year-ago.U.S. corporate profits, economic outlooks, surprisingly upbeat, Reuters.com
Not only that, the Wall Street beat rate, which measures how many companies beat their earnings expectations, was a stunning 78%! That’s not normal for a recession at all. Those are the kinds of numbers you would expect to find in a red-hot economic expansion.
FIRECracker and I have noticed this in our own personal finances. Because dividends are such an important part of our retirement income, we track payments as they come in over the year very closely. And this year, we’ve been noticing something very odd: our payments keep consistently coming in higher than what we expected. Digging into this, we realized that what’s happening is that companies have been increasing their dividends, sometimes in quite a dramatic fashion. Our international index that tracks the MSCI EAFE’s current dividend yield is 3.7%. A year ago it was 2.3%. That’s a 60% increase in dividends! Again, not normal for a recession at all.
And finally, the big one. Unemployment.
Recessions usually cause a spike in unemployment, but we’re not seeing that in the broader economy. Unemployment in the US is currently sitting below 4%, which for all intents and purposes is considered “full employment” by the Bureau of Labour Statistics.
And not only that, just last week the July jobs report announced a massive 528,000 jobs were created.
The US economy has now regained all jobs lost during the pandemic, after a blowout July jobs report that showed a gain of 528,000 jobs, according to data released Friday by the Bureau of Labor Statistics.Massive jobs surprise: US economy added 528,000 jobs in July, CNN.com
This caused unemployment to tick down even further to 3.5%, and represents a return to pre-pandemic levels of employment. So what the tech sector lost, it seems, has been made up by other parts of the economy that were shut down, who are now ramping back hiring as their customers come roaring back.
Technical Recession Vs. A “Real” Recession
So with some signs pointing to a recession, and other signs pointing the other way, what’s the right answer here?
I think that we have to make a distinction between a “technical” recession and a “real” one.
A technical recession is defined based on two quarters of negative GDP growth. A “real” recession, on the other hand, is somewhat subjective.
My favourite definition of a recession comes from President Harry Truman who said “It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.”
Because the most feared impact of a recession is not negative GDP growth in and of itself, but job losses.
Typically, a recession occurs in 3 phases: First, the stock market collapses. Then, job losses occur while unemployment spikes. Finally, months later, negative GDP growth gets reported confirming what everyone already knows: the country is in a recession.
In other words, the stock market normally acts as a leading indicator (a recession is coming), mass unemployment is a present indicator (a recession is here), and GDP acts as a lagging indicator (we were in a recession).
The fact that the first and last part happened without the middle bit is bizarre, and the blame for that lies squarely on one thing: the pandemic.
The world had never experienced a situation where entire economies were forcibly shut down. People were locked in their homes, businesses were shuttered, and money couldn’t be spent.
So of course unwinding all that was going to be messy and unpredictable. I don’t think that anyone foresaw just how messy and unpredictable it turned out to be, but if the result is a technical recession that exists only on paper and without the harmful effects on the job market that happens during every other recession, then maybe that’s not such a bad thing.
Is the US in a recession? If you’re in tech, yes.
But for everyone else, the answer is, so far, also yes but only technically. The rest of the US economy is in a technical recession, and has sidestepped the hit to the jobs market. This is what’s keeping Jerome Powell, the US Fed chairman, hopeful that he can continue to hike interest rates until inflation comes back down without triggering widespread job losses.
Here’s hoping that he’s right and that this technical recession doesn’t become a real one any time soon.
What do you think? Is the US in a recession? Has your job been impacted? Let’s hear it in the comments below!
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