The Best Recession Ever?

Written By: Rodney Johnson of The Rodney Johnson Report

June 14, 2022

The way inflation is heading suggests a recession, yet this isn't terrible news for the economy. Find out why this might be for the best for our society today.

The National Bureau of Economic Research (NBER) is the official arbiter of U.S. recessions, but the private entity doesn’t publish a clear mathematical formula for how recessions are identified.  A generally accepted definition is two consecutive quarters of falling real GDP growth.  If we go with that, then we’re halfway there.  

Real GDP growth fell 1.5% in the first quarter, and the second quarter isn’t looking too healthy.  The Atlanta Federal Reserve Bank’s GDPNow model estimates real second-quarter growth at a mere 0.9%, and that forecast has been falling for weeks.  It’s easy to see how we might get another quarter of negative real growth.  If that happens, and we enter a technical recession, it could be the “best” downturn we’ve ever had, and inflation would be the reason.  

Confidence in our economy seems to be low now, but as world events shift and change, we could see this rise and grow stronger

 

The current bout of inflation is running much hotter than anyone expected.   Many analysts thought the stimulus payments and demands for higher wages would lead to inflation, but few if any thought those pressures would push inflation anywhere close to 8%, and certainly would not push it over that level. To get numbers that high took something as unexpected and seemingly outrageous as Russia invading Ukraine and the ensuing Western sanctions.  To arrive at real GDP growth numbers, we subtract inflation from nominal GDP growth.  

In the first quarter, economic growth expanded by 6.5%, which is great!   But 8% inflation meant that real GDP growth came in at -1.5%.  With second-quarter inflation averaging about 8.25%, the current GDPNow estimate of 0.9% real GDP growth in the second quarter means that nominal growth should be 9.15%.  Again, that’s a huge number.  Our economy is shooting higher even as we deal with high inflation.  This is why the NBER might not call this a recession even if we get another quarter of negative real growth.  It’s hard to think of the economy as being in rough shape when unemployment sits at 3.6% and demand remains strong, which brings up the reason why this technical recession, if we get one, could be quite shallow.   We’re still working.

For the Fed to reduce demand significantly through higher interest rates, it would have to reduce demand for housing and cars dramatically, but we’re already starting at modest levels.  Existing homes sales, which account for 90% of all sales, fell to 5.6 million units last month, or about the annual average for 2016 through 2019.  Auto sales remain depressed because of the chip shortage.   We’re tracking to sell around 14 million vehicles in the U.S. this year, several million less than in 2019, before the pandemic.  That’s a good thing, because if the Fed dramatically reduced demand in these areas, it would drive up unemployment.  Without paychecks, people don’t spend, which could cause a recession.  

While this might be the “best” recession we ever live through, that doesn’t mean it’s not painful.  The high inflation that is driving down real GDP growth also is affecting our daily lives.  Average hourly earnings increased 5.6% over the past year but are down 3% on an inflation-adjusted basis.  High prices are cutting into our standard of living, which is not a good thing. 

For more information regarding the economy in terms of the dollar's impact on it, watch this video from Rodney Johnson

For more information on the economy, specifically in terms gas and oil prices, click this link provided by Truckload Indexes: 

Diesel prices: The loss of US refining capacity is making things worse - FreightWaves

Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. The information presented is not to be considered advice you can or should act upon for investment, tax or estate planning purposes without consulting with a professional to discuss your own set of unique circumstances. This article is designed to provide you with information regarding investing and planning for or during retirement.  You must seek professional advice separately before acting on any items discussed in this article. The views expressed are those of Rodney Johnson and not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. Rodney Johnson is not affiliated with Mutual Advisors, LLC or California Retirement Advisors.