Talk about a head fake. The rule-of-thumb definition of a recession is an economy that has had two sequential negative quarters. That’s what the U.S. has experienced this year, with a 1.6% contraction in first quarter gross domestic product and a 0.6% decline in the second. But those back-to-back results haven’t constituted an official recession, as there are too many positive indicators around.
The third period GDP report comes out Thursday, before the markets open. The estimate by the Atlanta Federal Reserve Bank, known as GDPNow, is for 2.9% growth, more in line with perceptible reality. We’ll know for sure Thursday, but the Atlanta Fed projection is usually pretty close. Of course, the National Bureau of Economic Research is the only entity that can declare a recession, and this designation takes a while, sometimes until the downturn is over.
All that said, expectations are rife among economists that the nation is headed for the Big R. It’s a matter of timing. The latest survey, by the National Association for Business Economics, shows that 75% of the economists polled believe a recession will show up within the coming 12 months.
Higher Federal Reserve interest rates, vexing inflation and slower corporate earnings growth are economists’ culprits for this coming downturn. At the moment, consumer spending still is expanding, although more slowly than before, and job growth remains strong (1.1 million added in the third quarter).
In BlackRock’s market commentary, rates are portrayed as strangling the good news on spending and jobs. “We see rising rates causing recession as inflation persists,” the commentary says.
Jim McDonald, chief investment strategist at Northern Trust Asset Management, agrees. “Corporate earnings and labor markets have been resilient to date. But we expect deterioration as policy continues to tighten,” he writes. What about Fed Chair Jerome Powell’s goal of a gentle economic slowdown? A “U.S. soft landing no better than even odds,” McDonald contends.
What happened to the first and second quarters, whose GDP results now seem far off the mark? After-the-fact explanations are that a big trade deficit and a steep fall-off of government stimulus skewed the first period’s report. For the second, the catalysts were diminished inventories due to supply-chain snarls and also the evaporation of federal aid.