Economy Not In Recession Until NBER Says It Is

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 2, 2022

IN THIS ISSUE:

1. We’re Not Officially In A Recession… At Least Not Yet

2. Two Consecutive Quarters Of Negative GDP Growth

3. Why The US Economy May Not Be In A Recession

4. Stocks In A Bear Market – How Deep & How Long?

Overview – We’re Not Officially In A Recession… At Least Not Yet

I’m sure I’ll get some blowback from some of my conservative readers for what I have to say today, but there are some issues regarding the economy I want to address. The Commerce Department reported last Thursday that 2Q GDP declined at an annual rate of 0.9%, following the revised decline of 1.6% in the 1Q. That’s two consecutive quarters of negative GDP growth.

Some economists and many investors have long believed that two or more consecutive quarters of negative GDP constitute a recession, and most often this is true. However, the official arbiter of when recessions begin and end is the National Bureau of Economic Research (NBER). The NBER has not declared we are in a recession yet, and there are several reasons for this as I will discuss below.

While back-to-back negative quarters of GDP growth have been a pretty reliable harbinger of recessions over the years, the NBER focuses on a broader set of economic data in determining when recessions start and stop. In this case, it may be a while before they do. I’ll explain why today.

Two Consecutive Quarters Of Negative GDP Growth

As noted above, the US economy just recorded two consecutive quarters of negative GDP growth, as reported by the Commerce Department last week. Last Thursday, the Commerce Department released its first “advance” estimate of 2Q GDP, and it came in at -0.9% (annual rate). That followed a revised decline of -1.6% in the 1Q. So, we’re in a recession, right?

Not yet, according to the NBER. There are several segments of the US economy which remain very strong, and the NBER has not concluded we’re in a recession just yet. While it may happen any day now, the NBER is the official organization which determines when recessions begin and end. They look at a lot more data than just GDP and thus are frequently later (and occasionally earlier) in declaring a recession has begun.

Within the NBER, there is a department called the Business Cycle Dating Committee which is made up of eight economists who determine when recessions begin and end. And it doesn’t use the same definition as the one commonly accepted of two or more consecutive quarters of negative GDP growth.

Rather, the NBER defines recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

This could mean two consecutive quarters of decline, but it also could mean more or less, depending on what they see in the actual economic data. It is true that every time since 1948 when GDP has fallen for at least two straight quarters, the NBER ultimately has declared a recession, which may have just happened. I’ll explain why I say “may” as we go along today.

Chart showing Real GDP number decreasing

Again, the GDP number is not the only major factor in the NBER’s calculations, and it actually declared a recession in 2001 without there being two consecutive quarterly GDP declines. And this time around, it may take more than two quarters of negative GDP growth before the NBER declares we are in a recession.

I’m not saying it will take a full three consecutive quarters of negative GDP growth for the NBER to declare a recession. It could announce such a decision at any time. But for now, the NBER wants to see more evidence before reaching such a conclusion. Here are the main reasons why.

Why The US Economy May Not Be In A Recession

First off, there are virtually no major Wall Street economists who expect the NBER to say the US economy was in recession during the first half of 2022. “We weren’t in a recession for the first half of the year, but odds are rising we will be by the end of the year,” said Mark Zandi, chief economist at Moody’s Analytics.

Like many of his cohorts on Wall Street, Zandi emphasized that the bustling jobs market – which has added an average of 457,000 jobs a month this year, is still not back to pre-Covid levels. The super strong jobs market is the leading reason why the NBER hasn’t declared a recession yet. But there are other reasons I will point out below.

Now I will tell you that most well-known Wall Street economists are liberals, so they don’t want to admit we’re in a recession because it’s bad for President Biden. But this time around, there are several important economic indicators which remain strong.

Even I was surprised when the Commerce Department reported 2Q GDP was down 0.9% last Thursday, and I’m certainly not a liberal.

But the Commerce Department said there were larger than expected decreases in private inventory investment, residential fixed investment, federal government spending, state and local government spending, and non-residential fixed investment in the 2Q, which were not fully offset by increases in exports and consumer spending. Also, imports, which are a subtraction in the calculation of GDP, increased in the 2Q.

At the risk of getting too far into the weeds, the decrease in private inventory investment was led by a decrease in retail trade (mainly general merchandise stores as well as motor vehicle dealers), according to the Commerce Department. The decrease in residential fixed investment was led by a decrease in "other" structures.

The decrease in federal government spending reflected a decrease in non-defense spending, which was partly offset by an increase in defense spending. The decrease in non-defense spending reflected the sale of crude oil from the Strategic Petroleum Reserve, which results in a corresponding decrease in consumption expenditures.

Chart showing the components of GDP

The increase in exports reflected increases in both goods (led by industrial supplies and materials) and services (led by travel). The increase in consumer spending reflected an increase in services (led by food services and accommodations as well as health care) which was partly offset by a decrease in goods (led by food and beverages).

Enough of that. Suffice it to say there were slightly more negatives in the economy in the 2Q than positives, according to the first estimate of second quarter GDP, which they reported as down slightly at -0.9%. But keep in mind the advance GDP estimate is based on limited early data and will be revised higher or lower two more times in August and September.

There is, therefore, the chance it could be revised higher the next two months as more data come in and could turn out to be modestly higher, in which case we didn’t have back-to-back negative quarters of GDP growth. I’m not predicting that’s what will happen, but it is certainly not out of the question. Or the number could get even worse – we’ll just have to see.

The point is, I can see why most well-known economists are reluctant to say we’re in a recession now. As noted above, the labor market is creating over 450,000 jobs a month this year, which is very strong, and there are still over 11 million unfilled jobs, with nearly two available jobs for every unemployed person. Plus, personal income and spending were both solid in the 2Q as well.

This does not suggest an economy which is in a recession. We’ll just have to see how the 2Q GDP revisions come in over the next two months to know for sure. The next GDP report will come on August 25.

Stocks In A Bear Market – How Deep & How Long?

A bear market in stocks is defined as a drop of 20% or more from previous highs. The average length of a bear market in stocks is 343 days with an average drop of just over 37%. Bear markets happen about every four years but are becoming less frequent.

The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) recently closed at its lowest price since November of 2020. Shares have dropped 24% from the all-time highs seen at the start of 2022. The NASDAQ 100 Invesco QQQ Trust (NASDAQ:QQQ) has fallen even further, losing nearly one third in that same time-frame.

S&P 500 Index chart

This puts both of these indices solidly in the bear market camp. In the past 92 years, there have been 21 such bear markets in the S&P 500 prior to the current one, according to Yardeni Research.

As noted above, the average length of the previous bear market has been just under a year at 343 days. The longest bear market was in 1930 and lasted for 783 days. The shortest bear market was just 32 days and occurred during the Covid-19 crisis of early 2020.

The bottom line is, while looking back at history is useful, it is still more of an art than a science regarding how long and how deeply bear markets will ultimately go. Much depends on the impetus behind the plunge in stock prices and relative stock valuations before the drop. Higher valuations have led to larger drops.

With consumer spending rising in the 2Q, I don’t think this will be a severe recession. Time will tell, of course.

All the best,

Gary D. Halbert

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Gary's Between the Lines:
2Q GDP Falls 0.9% – Looks Like We Are Now In A Recession