Are We in a Recession
From the desk of Dr. David Ashby:
You’ve perhaps been hearing talk about the likelihood of a recession. Are we in one already? Is it further down the road? Or is it completely avoidable?
For starters, let’s be clear about what a recession is. We measure output in our economy by gross domestic product, or GDP. It’s the final value of goods and services produced within U.S. borders. By final value, we mean the value to the final user.
Suppose a farmer sells tomatoes to Walmart for 30 cents a pound. Walmart sells them to you and me for 60 cents. Only the 60-cent price goes into the GDP number. This avoids the problem of double counting. Regarding within U.S. borders, that means production at a Ford auto plant in Europe doesn’t get counted in GDP. But cars produced by Honda in Ohio do get counted.
So GDP is a good measure of what’s going on in our country from an economic standpoint. We want GDP growing. It means you and me the consumer have access to more stuff. And supposedly more stuff leads to a better life. If GDP is negative, it means production is declining and we have access to less stuff. Two back-to-back quarters of negative GDP meet the technical definition of a recession.
How big is our national output, our GDP? In 2021, we produced around $23 trillion in goods and services. You might be vaguely aware that our nation debt is roughly $30 trillion. And you don’t have to be a math major to recognize that $30 trillion is bigger than $23 trillion. Which means the federal government debt (not including state and local government debt) now exceeds our annual output by a large margin. This debt to GDP ratio exceeding 100 percent only recently developed in the last 10 years or so.
This might be a partial explanation of why the Federal Reserve waited so long to start raising interest rates. Let’s face it, an extra one percent interest on $30 trillion could add up to serious money! But I digress.
In the first quarter, GDP was forecast to grow at a positive rate of one percent by a consensus of U.S economists. In fact, the actual number came in at a negative 1.4 percent. It was subsequently revised to a negative 1.6 percent as additional data came in.
Which reminds me of a point my late economics professor, Dr. Scott Boaz used to make. Dr. Boaz told us that when the Feds release economic numbers, they are going to be wrong. But they’re always wrong. So that makes them right! Which leads me to conclude that in some cases, two wrongs do make a right! Economically speaking, anyway.
For what it’s worth, the economists are now forecasting a second quarter GDP number range of slightly negative to slightly positive. If that number is negative, then we are technically in a recession. Back-to-back quarters of negative GDP.
How does this affect your investments? The stock market is considered a leading economic indicator, which means it has some predictive power over future economic conditions. Given that the stock market is down by around 20 percent or so, it seems to be forecasting a recession.
So, what to do? The good news is recessions are generally short lived, historically averaging 11 months. Since the stock market is a leading indicator, markets generally start improving even before we leave the recessionary period. So, it probably doesn’t make sense to dump stocks while they are at a 20 percent discount. By the time the economists figure out whether or not we’re in a recession, your portfolio may already be on the upswing!
Originally published by Magnolia Reporter.