Are We in a Recession?

From Baltimore – Are we in a recession?

It’s a valid question. After all, the economy – as measured by GDP – shrank in both the first quarter and second quarter of this year.

And many people use the rule-of-thumb definition of recession as two consecutive quarters of negative GDP growth.

This is highly meaningful for investors too. That’s because bear markets accompany recessions about 83% of the time, according to research by the National Bureau of Economic Research (NBER). And the research on bear markets and recessions suggests that bear markets tend to start after recessions do.

So if the economy has fallen into recession, we would logically expect the stock market to take another leg down this year.

(Note: Chief Investment Strategist Alexander Green thinks we probably did enter a short and shallow recession in the first half of this year. Though he rightly points out that the market is a forward-looking indicator and investors should remain in stocks.)

But most Oxford Insight readers are aware that two consecutive quarters of negative GDP growth is not actually how recessions are defined or dated. That’s done by the NBER’s Business Cycle Dating Committee.

That committee considers multiple economywide measures of economic activity to decide if and when a recession began. (And it makes an announcement well after a recession has started, sometimes more than a year later.)

Those measures include…

• GDP and gross domestic income
• Real personal income
• Nonfarm payroll employment
• Employment as measured by the household survey
• Real personal consumption expenditures
• Wholesale-retail sales adjusted for price changes
• Industrial production.

The Federal Reserve Bank of Dallas recently created a composite index of these recession indicators. You can see in the chart below that when you add them up, the trend is still upward (i.e., not a recession).

This recession dating process is nothing new. The NBER, a private think tank based in Cambridge, Massachusetts, has been doing it this way since 1929, long before GDP data was measured and published.

In recent decades, however, the NBER has put the most weight on two of those measures: real personal income minus government payments (like Social Security or unemployment assistance) and nonfarm payroll employment.

Basically, it’s looking at how abundant jobs are and how they’re paying.

Personal income rose about 0.7% in June month over month and is up more than 8% year over year. But real personal income (what you get after adjusting for inflation) was down 0.3% in June. That’s no surprise, considering that the latest reading on inflation came in higher than 9%.

So that indicator is slightly down.

Robust Jobs

But payroll employment this year has more than compensated for the dip in personal income. Last week, we saw a blockbuster employment report, with 528,000 new jobs created in July.

So far this year, the economy has produced about 3.3 million new jobs, with an annual rate of more than 6 million new jobs. That’s three times faster than what we normally see in a good year, according to Fitch Ratings. If this continues, the unemployment rate will be heading down toward 3%, lows the U.S. hasn’t seen since the 1950s.

Of course, that’s great news for workers. Jobs are plentiful these days, and it seems crazy to complain about it.

Good News Is Bad News

But that insane jobs number was not welcome news to the economists and policymakers in the Marriner S. Eccles building in the Foggy Bottom area of Washington, D.C.

That’s the home of the Federal Reserve. And right now, the Fed is laser-focused on fighting out-of-control inflation. Until recently, the hope at the Fed was that it could bend the economy with higher interest rates – without breaking it.

That hope is fading fast after last week’s jobs report.

Accordingly, the futures market is now pricing in yet another 75-basis-point hike (that’s 0.75 percentage points) in September. That would be three in a row and nearly unprecedented.

Economist and former Pimco CEO Mohamed El-Erian has said that a central bank needs time, skill and luck to engineer the holy grail of central banking: a soft landing that cools an economy without tipping it into a recession.

The inflation rate has run well above the Fed’s 2% target rate for well over a year now. So the Fed is clearly running out of time.

And ridiculously Pollyannaish comments from Fed Chairman Jerome Powell – suggesting earlier this year that inflation was “transitory” and more recently that rates don’t need to go much higher – suggest that the Fed doesn’t seem to have the requisite skill.

(Side note: The recently passed Inflation Reduction Act will do nothing to tame inflation in the short term – all the anti-inflation measures in the law kick in several years down the road.)

So recession or not, inflation is the real problem now.

To win the war on it, Powell & Co. will need a lot of luck.

Invest wisely,

Matt

Weekly Winners

The markets have been exceedingly chaotic, to put it mildly. But our Club strategists are still moving forward with their recommendations. Out of nine closed positions last week, they saw five impressive winners, including two triple-digit wins…

• Rocket Companies (NYSE: RKT) call option for a 73.08% gain in 34 days in Alexander Green’s Oxford Microcap Trader
• Marriott International (Nasdaq: MAR) call option for a 24.19% gain in 44 days in Matthew Carr’s Dynamic Fortunes
• Wesco International (NYSE: WCC) call option for a 198.88% gain in 16 days in Alexander Green’s Momentum Alert
• ZoomInfo Technologies (Nasdaq: ZI) call option for a 113.79% gain in 19 days in Matthew Carr’s Trailblazer Pro
• Vodafone Group (Nasdaq: VOD) for a 6.92% gain in 63 days in Marc Lichtenfeld’s Technical Pattern Profits.

All equity and options trades closed last week recorded a weighted average gain of 31.74%, while the S&P 500 recorded a gain of 0.36% during the same period.

Keep up the great work, Oxford Club strategists!