Are We Heading into a Recession, or Not?

by Jason Flores, CFA, CAIA – Chief Investment Officer 

Are we there yet? Oh, the familiar refrain that many parents endure this time of year while traveling. It is by now the familiar refrain that economists and investors are enduring daily. The question is a valid one and has implications for the economy at large. However, it is difficult to answer if the economy is there yet when the definition of “there” is up for debate.

There are two current definitions of a recession.

The first and most common is two consecutive quarters of Gross Domestic Product contraction. This is a technical recession, and the economy is already there. The second and official recession call comes from the National Bureau of Economic Research (NBER), more specifically from their business cycle dating committee. Per the CEO of NBER, they are typically 7 to 15 months behind calling the peaks and troughs of the business cycle, respectively, on average. Their mission is to be able to call the exact month that the business cycle turns, positive or negative, for comparison through time. If waiting for NBER’s call the economy likely will pass there by the time we know about it. Also important to note, NBER is not looking at the levels of the metrics they use but the rate of change in the metrics.

For a bit of context, the US has experienced nine recessions since 1958, with 2020 being the shortest. The decade between 1973 and 1983 endured three different recessions. Currently, in the US there are signs of slowing in the economy such as a decline in mortgage applications, sharp price decreases in commodities, reduced job openings, and cooling wage growth. While there is still debate whether we are in an official recession or not, the signs definitely point to a slowdown occurring. It is nearly impossible to predict the length and depth of a recession. For example, if a person had described a pandemic that literally shut down the global economy, as in 2020, predictions for the consequences would have been dire. While the ripple effects of the shutdown are still being felt, and it may take years before the ramifications are fully realized, it is hard to imagine that anyone would have predicted the quick rebound in the economy and asset prices.

Countless articles, books, and opinions have been published through history discussing recessions and depressions. Typically, a culprit for the downturn is identified and regulations are put into place to make sure it never happens again; except downturns do happen again, and likely will continue to happen. The important thing to remember is that not all recessions are created equal, and they don’t affect everyone the same.

The 2008 recession, fueled by a housing bubble, was felt much more acutely in places like Las Vegas. The recession of 2000, led by the tech boom, was more painful in tech hubs of California. The recession of 2020, caused by the government response to the pandemic, was on pace to be the most widely felt until the government quickly intervened. There are some differences this time around. If we get there, it will likely be an induced recession. Induced by the Federal Reserve’s need to get inflation under control. Even with signs of slowing, the Fed is unlikely to stop raising rates this year, although the magnitude of the rate hikes is likely to come down.

The low cost of living, low cost of running businesses, and a diverse local economy provides Missouri with competitive advantages that may well insulate the local economy relative to other parts of the country should an official recession be called by NBER. Businesses should be paying close attention to their customers now, because by the time they tell us we are there it is likely that we will be way past.