As we wrote back in July’s blog “The R Word“, despite media and many economists and financial pundits arguing that we were in a recession, we did not think we were in one. Yes, there were two consecutive negative GDP (Gross Domestic Product) prints in Q1 and Q2, meeting the “technical” definition of Recession, but that was truly just a technicality (trade imbalance and an inventory decline, thanks in large part to supply-chain bottlenecks). However, consumer spending, employment levels, and manufacturing activity all were strong and did not signal a recession.
In yesterday’s first look at Q3 GDP, we came in at a very healthy 2.6% annual pace which was even better than expected. This confirms what we suggested, which was that we were not in a recession, at least not yet. And, since we argued then that whether we were or not in a recession wasn’t that important, we will stand by that now. While the economy is fine at the moment, we are certainly headed towards an eventual recession unless there are some improvements in our Inflation data and soon enough to stop the Fed’s dogged determination to slow it.
Still, we know the markets and investor statements certainly feel like a recession, and even if we avoid one, there is no doubt that there have been some painful “adjustments” to asset prices. Remember though, the market is a forward-looking indicator. Certainly, markets began predicting an economic slowdown back as early as January as the decline was just beginning. No surprise that we are seeing a hit to corporate earnings and in housing. The real question is what the economy holds for us in 2023?
If inflation data can somehow moderate as a result of improved supply chains, softening demand and horrible investor/consumer sentiment, then it is quite possible the worst is behind us. Let’s face it, this is the goal of the Fed. An end to the conflict (war) in Ukraine would also be a catalyst to improve inflation data. However, if this inflation continues to haunt us and turns out stickier than many think, then we will very, very likely see a recession in 2023. By the way, it would really help our battle with inflation if Washington would stop spending money like a drunken sailor, but we won’t hold our breath for that one.
In summary, we obviously hope a serious recession isn’t the outcome, as it will bring even more pain to consumers and investors. There are some reasons to think that can be avoided, but we just don’t know at this point. We’ll be following the data, as that will tell us all we need to know. In the near-term, we think seasonal/cyclical trends continue to point to improving markets, so perhaps we’ll all have a happier Holiday season than it appeared just a few short weeks ago.
Until next time….
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.