What Recession Means to You

There’s a saying, “It’s a recession when my neighbor loses his job, it’s a depression when I lose my job.” 

Technically a recession is six months of falling GDP (gross domestic product). We could very well be facing this now, and it certainly feels like we’re living it. But feelings don’t necessarily make reality. In a recession, the unemployment rate goes up as employers slow down hiring and start layoffs. Credit and the flow of money slow down. Investment slows. Prices of homes and cars go down as people are unable to spend as much. Everything slows down.

Almost none of this is happening now. Yes, some tech companies are rescinding job offers and laying off bloated staff count, but the economy isn’t just tech. We’re still broadly adding jobs. The tech industry shedding could be a result of overstaffing in the first place. Overzealous hiring based on pandemic-era forecasts may have been too optimistic. 

NBER (National Bureau of Economic Research) is the agency that officially states when we’re in a recession. The shrinking six months of GDP growth, that I mentioned earlier, can be a result of a bug in manufacturing. For example, companies produced so much at the end of 2021 that they needed to slow down in early 2022 because they had way too much inventory. GDP measures will see that as an economic slowdown when it actually is an ebb and flow to rebuilding inventory. Back to NBER, whose definition is broader, “The NBER's definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months”. In other words, “we’ll say it’s a recession when we feel like it!” The announcement, when/if it happens, won’t be until months after a recession has already started.

Currently, unemployment is at 3.6% while the full unemployment target rate is at 5%. We can lose jobs and the economy can still be considered healthy. To have unemployment rise to target levels, millions of people would have to lose their jobs. And there’s no guarantee that unemployment will stop going up at 5%. There’s no switch to stop the rise of unemployment. While most workers will be spared, this will affect everyone to varying degrees. 

Switching jobs will become more difficult, and that puts a crimp on upward mobility and job satisfaction. We’ve all felt “stuck” at a job because there are no better alternatives. Rising unemployment will reduce the available job opportunities. Those fortunate enough to hang onto their jobs will feel an elevated level of stress regarding job security.

Banks will tighten lending standards to shore up potential risks. Now we’re boxing out potential home buyers. A family looking to upgrade will have to pause because they can’t sell their current home as easily, or afford a new mortgage at higher rates. 

Manufacturing and production will slow. We measure PMI (Purchasing Managers’ Index), which shows how much material and supplies are being ordered for production. On the chart, green means we’re expanding, and red means contraction. A recession means we produce less, and there are no signs of that outside of Russia and China.

Regardless of what label we put on this economy, jobs are still plentiful, production is strong, and consumer balance sheets are healthy. By destroying demand to address inflation, we will put at risk all the good data and results coming through. 

Gas prices have come down even though it isn’t officially recognized in any Fed data, even so, they’re aware of where the direction of gasoline is headed. Prices of other commodities are all coming down as global demand wanes. These are all directionally positive for what we want for the markets and economy.

While a recession is a possible cure for high prices, it’s the last thing we want. Given time, we’ve seen the supply chain improve and commodity prices come down. These are positive signs that are naturally occurring in the market. 

Disclosures: 

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