Changing the definition does not solve the problem

Changing the definition does not solve the problem

02 August 2022 from Anna Svahn

 When the second quarter GDP figures came in with negative numbers, President Biden shook his head and said "no, we are not in a recession". Biden argued that although the US economy has now contracted for six months in a row, there are many other economic indicators that show the underlying economy is strong after all, such as unemployment being at record lows.

However, it would be an exaggeration to call the first quarter's -1.57 percent and the second quarter's -0.93 percent a deep economic crisis, but if the fall continues, we will eventually get there.

What are the real signs that we are in a recession? And what evidence points to the contrary? How will the Federal Reserve act in the coming months and was the July rally in the stock market a signal that the bottom had been reached or merely a bear market rally?

Apart from the fact that US GDP has actually shrunk for two quarters in a row, many other things point to the fact that we are in or will enter an actual recession now. Despite Biden's view that low unemployment is a sign of a strong economy, that's when historically the risk of a recession has been highest.

Low unemployment does not per se mean that a country is heading into a recession, but it is a measure of how employment and the economy is. In the case we are in right now, unemployment is at a low 3.6% despite several companies warning that they will have to lay off staff during the year due to a weaker outlook. What points to the contrary is a possible pivot from the Federal Reserve, which despite having just raised rates for the second month in a row by 75 bp communicated to the market that they are reviewing whether they need to pause rate hikes further down the road. Before then, however, several 50 bp hikes are scheduled, which will have an additional effect on the market.

Despite the rise in July, the fundamentals continue to look bleak for equities, and it is still too early to allocate into tech in the hope of a turnaround from Powell. For that to happen we first need to see the US economy shrink another quarter or two, as well as effects on the labour market. Until then, the central bank's priority will be to get inflation under control which means falling asset prices work to their advantage rather than disadvantage.

One thing is certain, however: although President Biden does not want to acknowledge that the US is in a recession, and thus allows the very definition of the phenomenon to change, this does not mean that the economy is undergoing growth. You can disguise a situation under a different name but the underlying problem still remains.

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04/10/2022 19:10:27

 

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