Are We Entering a Recession?

Telemus Weekly Market Review December 19th - December 23rd, 2022

A question we are getting asked more frequently these days is whether the U.S. economy is going to enter a recession in 2023. We can offer an educated perspective, but the truth is only the future will tell. It’s a topic that is actively discussed and debated within Telemus and we wanted to offer our perspective on this important question. 

To answer the inquiry, we must first define a recession. The common, unofficial definition of a recession is two consecutive quarters of negative economic growth (as measured by Gross Domestic Product, or GDP). The U.S. economy in fact achieved this definition in the first and second quarters of 2022, when GDP growth dipped negative. However, given how GDP is measured, its interpretation is not straight forward. GDP is quoted as an annualized growth rate; however, it is measured on a quarter over quarter comparison, with seasonal adjustments being made. Therefore, the GDP growth rate for the first quarter of 2022 measured the U.S. economy in comparison to economic activity in the fourth quarter of 2021 but made adjustments for the fact that the fourth quarter always has greater activity due to holiday spending. One could argue negative readings in Q1 and Q2 of this year were inevitable given the elevated bounce back in economic activity as the U.S. population came back from restricted activity due to COVID. As activity returned to normal, inevitably quarter over quarter growth was likely to reset and lead to some negative readings.  

Alternatively, for a recession to have officially occurred it must be deemed so by the National Bureau of Economic Research (NBER). According to the NBER a recession is defined as a significant decline in economic activity that is spread across the economy and lasts more than a few months. The NBER’s Business Cycle Dating Committee makes this call and considers a variety of data to determine if the depth, diffusion and duration of activity warrants the classification of a recession. Given the committee driven process, the timing of when the economy enters and exits a recession occurs in hindsight. For example, when the Great Financial Crisis occurred, the NBER stated in December of 2008 that the recession began in December of 2007 and in September of 2010 declared that the recession ended in June of 2009. 

Given the nuances in how recessions are declared by the NBER, we must recognize that we won’t know when the recession starts until after it does. This begs the question of whether we are in the recession now or will be entering one in 2023. 

The bright spot of the economy as it stands today has been the health of the consumer. Despite the highest inflation we’ve seen in 40 years, consumer activity remains strong. Albeit a greater share of spending is going toward necessities such as food, housing and gasoline. The health of the consumer is supported by a very strong job market. Unemployment remains below 4%. The number of job openings per unemployed worker sits just under two-to-one. Lastly, average wages are up over 5% in the past year, supporting continued growth in consumer consumption. While the present climate is positive, we must also recognize that consumers are saving at the second lowest rate on record (second to 2005) and have been accelerating their usage of credit cards to finance purchases. Given this, it’s likely that at some point consumer spending will slow, unless wage gains remain elevated or we see some notable deflationary pressure in key spending categories, such as food or shelter.  
Outside of consumer spending, economic activity has generally been softening. Manufacturing activity has in recent months begun to contract. Moreover, new orders continue to decline, which would indicate a rebound in industrial activity is unlikely to happen in the next few months. More broadly, measures around business investment indicate companies are slowing investment spending as they are becoming cautious on the economy. Construction activity, both residential and non-residential, has started to slow at a more rapid clip. Higher interest rates are making new construction less economical. This past week’s release of an -11% monthly decline in building permits underscores this fact. 

As we consider these various pieces, we must acknowledge the probability of a looming recession has increased. Candidly, as the Federal Reserve has taken action to slow the economy, the risk is that they will overdo it and push the economy into a recession. Combating elevated inflation and not putting the economy into a recession would be akin to the Fed threading a need with its policy. The strength of the labor market would indicate that a mild to moderate recession is unlikely to lead to outsized unemployment. Given how hard it is to find workers, employers are going to be reluctant to cut staff unless is necessary. A tighter labor market should support wages as well. Therefore, while a recession in 2023 is a growing probability, we expect it to be manageable and one that may have long-term benefits in helping to stifle inflationary pressures that have been rooted in the economy over much of the past two years. 

As we look to close out 2022, investors are anxiously awaiting a new year. This past year has been a challenge regardless of your allocation to stocks or bonds. In this week’s edition of Barron’s magazine, legendary investor Bill Miller was quoted as saying, “The future is inherently unknowable…but if you think about it, the basic fact is that the U.S. economy grows over time.”¹  We recognize economic risks are present as we enter 2023 and there will likely be an unknowable curveball along the way. However, over the longer term, we believe the underpinnings of the U.S. economy will allow for durable growth that will ultimately be supportive for the long-term returns of stocks and bonds. 

On behalf of all of us at Telemates, we want to wish you all a happy and healthy 2023!

¹ “He’s Still a Bull on Amazon and Bitcoin.” Barron’s. December 26, 2022, page 26-27. 

All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.

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