Economy Avoids Recession For Now

Stocks opened higher this morning: Dow +30 points; SPX +.5%; Nasdaq +.8%. But exchange trade volume is low and the fact is, investors haven’t had much conviction since the 2-month rally recently ran out of steam. Earnings season was on balance positive, but I suppose now we’re looking for a catalyst to push the rally further. Absent that, bond yields and oil prices are probably in the driver’s seat. WTI crude oil has been inching higher over the past couple of weeks (now at $95/barrel). Treasury bonds have been falling in price, pushing yields higher. Both of those moves encourage lower stock prices.

The unnamed catalyst could be economic data confirming that we are/aren’t in a recession, that inflation is/isn’t falling, etc. But many investors are looking to the Federal Reserve, currently hosting its annual policy conference in Jackson Hole, Wyoming. Chair Powell is scheduled to deliver a keynote address on Friday morning discussing his views on monetary policy. Will he deliver more tough talk on inflation, or will he soften his tone? No one knows but we’ll certainly see some stock & bond volatility surrounding the event. I need to point out, however, that if your investment horizon is longer than one week, you can safely ignore Jackson Hole. It means nothing.

The housing market is clearly softening up. Existing home sales are down 20% y/y, homebuilder sentiment is depressed, and we’re finally seeing an uptick in inventory. The number of homes on the market—measured in how many months it would take to sell them all at the current pace of sales—has risen from 1.6 to 3.3 this year. We’ll likely see more deterioration in the immediate future. July’s pending home sales, which translate to actual sales in August & September, fell 22.5% y/y.

On the other hand, the labor market remains strong. New weekly filings for unemployment insurance remain less than 250,000, and the total number of people receiving benefits is about equal with pre-Covid levels. Despite a recent PricewaterhouseCoopers survey suggesting that half of US employers are either reducing or planning to reduce headcount, we just haven’t seen a meaningful uptick in layoffs. In fact, the survey also found that two-thirds of firms are increasing pay or benefits.

Today the Commerce Dept. confirmed that adjusted for inflation, the US economy shrank during the first half of 2022. Using the traditional Gross Domestic Product (GDP) calculation, economic activity fell 1.6% in the first quarter, and another .6% in the second quarter. At first glance, this seems to suggest we’re already in recession. But Bloomberg economists aren’t so sure. An alternative measure, Gross Domestic Income (GDI), suggests growth has slowed but remains positive. To be simplistic about it, GDP assesses the sale value of all goods and services produced whereas GDI focuses on income (worker compensation & company profits) generated by those sales. Typically, GDP and GDI follow one another fairly closely, but at the moment they’re sending very different signals. GDI tells us that while growth is broadly slowing, consumers are in good shape financially. We are not in recession.