Weirdest Recession Ever

July 28, 2022

Second quarter GDP arrived this morning, declining 0.9%, the second straight quarterly decline.

This is where the fun begins. Are we in a recession or not?

If you like the president, it's not a recession and there's plenty of ammo to prove your point. If you don't like the president, it's a recession and there's plenty of ammo to prove your point.

Did I say the same thing twice? Yes.

That's an oversimplification but it does feel like politics drives a lot of this.

The National Bureau of Economic Research (NBER) - usually the arbiter of what is or isn't a recession - acknowledges most recessions are defined by two consecutive quarters of declining real GDP, but it does not happen in all instances.

In short, it's generally a rule of thumb. Take 2001 for example. Here was the GDP by quarter in '01:

  • Q1: (-1.3%)

  • Q2: +2.5%

  • Q3: (-1.6%)

  • Q4: +1.1%

We did not have two consecutive quarters of negative GDP but NBER said a recession took place from March-November 2001. So did we have a recession or not? It's like a teenagers relationship status ... "it's complicated".

It's completely understandable for the "you're moving the goalpost!" crowd to say this is a recession. It's certainly possible and things could get worse. Initial jobless claims increased to their highest level of the year this morning, which could be a leading indicator of more problems.

But I'm not trying to convince anyone we are or are not in a recession. If you're one of the employees that got laid off at Shopify or Ford this week, it's a recession. If you work in the oil & gas industry, things have never been better.

Things are very confusing. Fed chair Jerome Powell made this case yesterday saying "these are not normal times". Hard to disagree.

If you're looking at the "Recession v. Not Recession" box score, on the "recession" side of the ledger you have:

  • Two consecutive quarters of negative GDP.

  • Highest levels of inflation in 40+ years.

  • Lowest consumer sentiment ever according to survey data going back to the '50s.

On the "not a recession" side of the ledger you have:

  • A strong labor market. 2.1 million jobs added in the first half of the year. 3.6% unemployment rate.

  • Earnings reports from Visa, Mastercard, American Express, Bank of America, JP Morgan all echoing the same thing ... the consumer is fine with no signs of a spending slowdown. (The Las Vegas strip reported June gambling revenue up 23% vs. last year this morning. Do we need rate hikes every week?!?)

  • Europe might not even have heat this winter and Louis Vuitton put up record numbers in the first half of the year. That's nuts!

In short, you can build whatever narrative you want. Things are crappy in some areas and awesome in others. The S&P rallied after the GDP number came out; this probably won't mark "THE" bottom but it could be "A" bottoming of sorts. It's always an interesting (good?) sign when the market rallies on bad news.

Who knows what to make of all this.

Charlie Munger said it best, "If you're not confused you don't understand it."