Second quarter GDP declined by an unanticipated -0.9%, following Q1’s -1.6% pullback, fitting the historical definition of a Recession of two consecutive quarters of negative GDP. The National Bureau of Economic Research, the arbiter of what actually qualifies as a recession, has more recently broadened its actual definition to include the qualitative component of “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”. Given the world’s recent emergence from a pandemic (or in China’s case, an ongoing battle with Covid), we’re willing to cut the NBER some slack and go with the more qualitative version of the definition.
Regardless, economic data is pointing to a slowdown in the U.S. economy, which is not too surprising given the Federal Reserve’s +250 basis points of tightening thus far in 2022. July’s 75 bp hike in the Fed Funds rate likely brings the Fed “current” in its battle with inflation, although history suggests Fed Funds needs to be raised above the rate of inflation before victory can be declared. June’s +1.3% MoM rise in CPI (+9.1% YoY) along with PPI’s +1.1% MoM increase (+11.3% YoY) suggests inflation continues to run hot, although perhaps peak price pressures have been set. Ex Food & Energy, consumer prices have risen +5.9% from a year ago while Producer Prices are up +8.2%. The Fed’s favored measure of inflation, the PCE Core Deflator has risen +4.8% over the past 12 months.
In order to gauge the effectiveness of Fed rate hikes in the battle against inflation, economists are watching Initial Jobless Claims closely to see whether corporate America is cutting back on hiring in the face of higher interest rates and slowing growth. Any rise in claims would likely be viewed favorably in that destroying the demand for labor is a necessary element in bringing inflation down. Weekly Initial Jobless Claims numbers began July at 235k per week and closed the month up at 256k, so perhaps the medicine is working. The Unemployment Rate in June came in at +3.6%, near historic lows, while the JOLTS Job Openings number for May remained robust, north of +11 million.
Corporate earnings for the second quarter have thus far been a mixed bag (more on that in the Equity section); however, the major tech companies reporting so far have indicated that things may not be quite as bad as feared. The Fed will likely need to continue raising rates into the 4th quarter, although probably at the more measured pace of 25 bps per meeting. Signs of a slowing US economy will give the Fed cover for a more deliberate and perhaps slower pace of tightening, perhaps spurring risk assets higher. In essence, bad news in the short term could prove to be good news in the long run.
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