The Semantics of a Recession
an economic slowdown
ok well things sure are thinging out here
When Things are Not What They Always Were
The White House sent a message out this week that the definition of a recession is not 2 quarters of declining GDP growth (because it isn’t1) which sent a lot of people into an uproar. Which makes sense, many educational institutions and journalists will use 2Qs as shorthand, which creates confusion when people find out that isn’t true.
Why is it so confusing? Jason Zweig from the WSJ probably gave the best answer - politics. It’s always politics.
“The CFA Society uses 2 quarters, what person from Washington is paying you to lie to people” is a direct comment I got when saying that no one changed the definition. I’ve written extensively on the Recession mindset - the vibecession, if you will - and can’t really wrap my mind around the commitment to 2Qs as a Recession.2
Quantitatively: All you have to do is look at March of 2020, which was a two *month* Recession, and that 2Q metric is no longer plausible. On the flip side, we have also had 2Qs contraction in GDP that wasn’t a recession back in 1947!
Qualitatively: Joe asked an important question yesterday - What additional info is revealed by designating it a recession or not? Of course, the answers are things like political blame, labels, sticking-it-to-the-man, (media cycles), vindication.
Right, sure of course. But we have 2Qs of declining GDP growth. Things are not great.
It really doesn’t matter that much - recession, not a recession. We are in an economic slowdown, that much is clear. Now it’s most important how we move forward.
Metrics and Measurement
One thing I’ve been thinking a lot about is how metrics aren’t what we think they are. The market/economy is not what we think it is as the pandemic-war-supply-chain-meltdown shifted how things work, and thus should really shift how we measure things. The lens through we view our world *quantitatively* is kind of… archaic.
The economy has evolved: Even just with the GDP-recession argument - there’s a point to be made that GDP doesn’t fully reflect how our economy has changed in the social-media-hyperonline-tech-driven world. Matt Klein wrote about this back in May -
Nearly $1 trillion of economic activity is missing from the U.S. GDP numbers… the point is that crucial elements of the headline U.S. economic data are somehow wrong. My strong suspicion is that existing methods for tracking capital spending by American businesses on both physical and intangible assets are failing to capture what companies are actually doing.
As Cardiff Garcia wrote back in 2015 -
A lot of attention has been given to methodological issues with the inputs that generate growth statistics these past couple of years… the difficulty of properly accounting for services in an economy that is increasingly dominated by them
Our economy has changed but our methodology hasn’t. There are two ways to look at Economy Go Up - GDI and GDP.
GDI is more focused on income (wages, profits, interest income) whereas GDP is more focused on expenditures (consumer spending, government spending, etc). They should be the same number!! But they aren’t.
And the core answer for the divergence is that GDP… is not being measured accurately. Which like! Whoa!
Numbers are weird.
And they are weird everywhere, which impacts analysis: There’s a good research paper that was published last month called ‘Missing Financial Data’ that walks through how to manage loss of financial data from large firms. Things are only as complete as they can be, and they are often not that complete.
Other metrics: Dion Rabouin from the WSJ has a really great video walking through some other market indicators beyond GDP that show how the market is pricing in a recession.
A good one is the Corporate Bond Market Distress Index (CBMDI) which tracks the flows of bonds and is showing distress because the bond market is a bit spooked out.
He also mentioned the inverted yield curve - which going back to numbers are weird, if we are in a Recession, this indicator actually didn’t work this time around.
That carries important implications for how we think about everything. That’s why I write about vibes so much, because at the end of the day, the expectations of people is the *most important thing*. Powell has a press conference to let *people* know what’s going on, we yell online because we are mad about *people* and both GDP/GDI, etc whatever, are driven by the actions of *people*.
But what are the numbers saying?
But of course, numbers matter because they dictate narrative.
GDP falls: GDP came in weak today, falling 0.9%, with personal consumption growing only 1% - and with consumer spending making up ~70% of the economy, that’s pretty concerning.
The biggest drag on GDP was residential investment (which largely measures housing, and as the BIS has a great paper on has “consistently anticipated economic downturns”) which fell 14%. This is not great but the numbers still point out one thing - it’s just not good out there.
Of course there is nuance and semantics and a whole host of other vocabulary words that we can try and throw at this. It’s a vibecession for sure (JPMorgan titled it a productivity recession), we still have a bit to go before it’s an actual recession but like - you know. It’s still not great. Vibes are bad.
Of course, these numbers will still be revised and NBER looks at more than just GDP growth to determine if we are in a Recession. There were some positive signs there -
Real personal income less transfers - which was up in Q2
Nonfarm payrolls - which were up in Q2
Real consumer spending - which was up in Q2
Real manufacturing/trade industry sales - which was down in q2
Household employment - which was down a bit
Industrial production - flattish
Real GDP - which was down
Real GDI - which was up as of Q1 (haven’t gotten Q2 yet)
So if not a Recession… what?
One of the reasons that we are not in a Recession right now according to Powell and many others is because the labor market is strong.
Um: There are a lot of arguments to be made against that too, of course - unemployment is a lagging indicator, people are getting second jobs, the labor force isn’t robust - but it’s still a relatively strong-ish labor market.
BUT we also got jobless claims numbers today, and those are also flashing red. The labor market is beginning to show soft spots, which definitely makes the whole are-we-in-a-recession argument more powerful
Companies are already like “it’s getting rough out here”
Contradictions: Wal-mart and other retailers entering this weird matrix of ‘inflation becoming deflationary’ as they lower the prices on apparel because the consumer dollar is going towards needs instead of wants right now.
But pricing power!! McDonalds and Coca-Cola are doing great because they are able to pass off costs to consumers, which doesn’t help consumer confidence at all. Visa was like “people are definitely out here spending money”.
There seem to be different economies - tech is going through a series of layoffs, whereas manufacturing can’t find enough workers. Texas Instruments is booming whereas Meta is not (Apple managed to skewer $10b of revenue for them in their new privacy opt-in!).
Everything reverts to its simplest form in times of crisis.
What is the Fed doing?
The Fed has demand-side tools for supply-side problems. They raised rates by 75 bps yesterday, getting a bit closer to neutral, with the main goal of “realigning supply and demand”.
Once again, fast and furious, and it’s working: The Fed is zooming along in the face of a slowing economy, which they highlighted in their press release.
Financial conditions have tightened, energy costs are still incredibly high, and we are starting to see weakness in the labor market.
The *risk* now is the Fed doesn’t blink because they are so focused on getting inflation down - which could result in a severe downturn.
Fed cred: They said that they are going to continue raising rates but the bond market clearly doesn’t believe them, with the 10Y falling. As Kathy Jones said - “when the Fed hikes rates into a slowing economy bond yields are going to fall. The more they hike, the lower they will go.” Fed could lose some credibility, which is never a good thing in the art of managing expectations.
Stronger dollar: The other worry is a stronger dollar - as the Fed continues to hike, the dollar acts as a safe haven, attracting flows. But a strong dollar puts a lot of pressure on emerging market nations and their dollar-denominated debt, which makes the Fed’s domestic policy very international.
The stock market is happy because it thinks that bad economic data means that the Fed is going to slow down, which means that stonks can get back to ripping.
But as discussed earlier, things are not how they used to be.
It’s Not Just Monetary Policy
In very good news, fiscal policy finally stepped up in multiple ways. First, the government finally unlocked more tools for the Department of Energy. Secondly, they passed the Inflation Reduction Act, which will provide support to energy and healthcare costs, which is huge! As Brian Schatz wrote -
This will be the biggest climate action in human history. $370B for investments in clean energy, clean transportation, energy storage, farming, home electrification, and clean tech. The planet is on fire. Let’s get it done.
Lowers energy costs, increases cleaner production, and reduces carbon emissions by roughly 40% by 2030
Allows Medicare to negotiate drug prices and caps out-of-pocket costs to $2,000
Lowers ACA health care premiums for millions of Americans
For The Future
The main thing about inflation and economic growth and the labor market is that it needs to be stable - and as EmployAmerica wrote “to state the obvious, productive capital formation and maintenance are critical to achieving lower inflation over the long-term”. There is a lot of short-term thinking around a lot of long-term problems.
Daniel Altman wrote a great piece called Fix This Economy Now! highlighting how we can make our economy work better
Reinvest in workers and students: He proposes a new G.I. Bill for workers that have lost their jobs as a result of globalization or technology, embracing a market for training as well as equity investments in a cohort of students.
Provide basic necessities: Anti-hunger tax or point-of-sale donation at fast food restaurants which could help us make sure our kids are fed
Invest more: Golden rule budgeting, sovereign wealth fund for riskier assets, as well as a hybrid income and wealth tax are some of the other ideas, with the goal of realigning investment with positive outcomes.
The main point of the article was thinking differently about things.
We kind of get stuck in these corrals that limit how far we can see to the side of us - it’s not always about moving forward, but about moving laterally too. We need to understand the scope of the problems we face - and that’s more than just GDP coming in negative.
It’s our future and our present, making sure our kids get the nutrition they need at school, and making sure that our people have the training and support they need to make the world a better place to be.
I think one thing that bugs me about the “discourse” is that we get so caught up in what things are, that we forget what they mean. Housing costs are skyrocketing (specifically rent) - and they likely won’t come back down unless proper policy is put in place. And this actually circles back to GDP, because a decline in residential investment was actually a large driver of the fall in GDP. But of course, the headwinds are numerous.
Many people don’t experience the economy in GDP growth - they experience it in the cost of groceries and gasoline. I think this point from Wendy Edelberg is important too - “the typical American is not going to feel or experience a difference between an economy that is growing 0.5%, 0% or -0.5%.”
We always tend to forget that people doing okay is the core goal of basically everything.
I still don’t know the answer to this -
Even though things are improving (gas prices falling, mortgage rates falling, hopefully things just slowing down in a sustainable way) it’s still frustrating. We have to start rethinking how we think about things - analyzing the tools we have, and the frameworks we implement, and perhaps trading them in for something different.
There is a poem (of course there is) that I love by Albert Goldbarth called The Sciences Sing a Lullabye that I think helps to gut check the weirdness of the present day -
Physics says: go to sleep. Of course you're tired. Every atom in you has been dancing the shimmy in silver shoes nonstop from mitosis to now. Quit tapping your feet. They'll dance inside themselves without you. Go to sleep.
Geology says: it will be all right. Slow inch by inch America is giving itself to the ocean. Go to sleep. Let darkness lap at your sides. Give darkness an inch. You aren't alone. All of the continents used to be one body. You aren't alone. Go to sleep.
Astronomy says: the sun will rise tomorrow, Zoology says: on rainbow-fish and lithe gazelle, Psychology says: but first it has to be night, so Biology says: the body-clocks are stopped all over town and
History says: here are the blankets, layer on layer, down and down.
Thanks for reading.
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The reason it isn’t a full Recession is because you have to look at more than just GDP (which is what NBER does) to get a good sense of what is going on with the economy
To note, the average of the two is best, a metric called Gross Domestic Output.
Can’t have green energy policy without green energy investment!!