Recession view in the eye of the beholder

Yes, we have no recession.

That’s the word from President Biden who stated, “We’re not coming into recession, in my view. I don’t think we’re going to – God willing – I don’t think we’re going to see a recession.” This sentiment was echoed by Brian Deese, director of the National Economic Council, who said overall economic data is not consistent with a recession. Meanwhile, Treasury Secretary Janet Yellen insisted, “We’ve entered a new phase in our recovery focused on achieving steady, stable growth.”

These assertions fly in the face of what anyone can see – negative GDP “growth” in the first two quarters of 2022. Two quarters of negative GDP are the popular definition of recession.

So, what are you going to believe? GDP data or politicians in denial?

Rather than deal with the here and now, the White House wants to wait for a recession declaration from the National Bureau of Economic Research. The bureau is a private organization which, for unknown reasons, became the arbiter of business cycle dating. The bureau “emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.” Factors include “real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production.”

This is all well and good except for one small detail: The bureau approach is retrospective. In making its recession and recovery pronouncements, it “waits until sufficient data are available to avoid the need for major revisions to the business cycle chronology. In determining the date of the peak in activity, it waits until it is confident that a recession has occurred.”

The practical effect of waiting for absolute confidence is that the bureau never makes a call until a recession is well under way. It did not recognize the onset of the Great Recession of 2007 until a year after it started. It did not recognize the Covid recession of 2020 until after it ended.

Meanwhile, signs of recession abound. The yield curve is fully inverted with short-term interest rates exceeding long-term interest rates. Inverted yield curves are almost always accompanied by recessions. New unemployment claims have risen by an amount predictive of recession. A sharp rise in oil prices preceded five of the past six recessions. The Conference Board’s Leading Economic Index declined for the fourth consecutive month which the board says, “points to a US economic downturn ahead.”

These factors do not predict the length or depth of any recession. But we have a president and a Federal Reserve Board Chairman who completely misjudged the risk of inflation in 2021. Watching this duo raise interest rates and increase taxes in the face of two quarters of negative growth does not inspire confidence.

Jeffrey Scharf is the Founder of Act Two Investors LLC, a registered investment adviser. Contact him at [email protected].

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