Here Comes That R Word - Recession

With the 2nd quarter GDP number now unveiled, the R word is going to hit the headlines and for many, fears for our economy and investments will increase again. Now, we are not economists. And we have very fundamental beliefs on financial markets and asset allocation. But from time to time we dive into the weeds with you, if only to share the counterpoints to the media’s fear-based headlines.

Here are a few thoughts on “Recession” and what it means for you. 

• Recession is commonly defined as two consecutive quarters of a declining economy, reflected in Gross Domestic Product, or GDP. GDP is really just the net of the value of what our economy produces, less the value of the services used up to produce those good and services. 
• That’s not a technical definition of recession though. There’s interpretation and economists are taught to weigh in on whether that slowing (beyond the numbers) is “prolonged, pronounced, and pervasive.” 
• GDP for the 2nd quarter was negative again, so some will say we are now in a recession. Others would argue this slowing has not YET been “prolonged, pronounced, and pervasive.” 
• Why not? Digging deeper, GDP is made up of multiple data points; private consumption (us as consumers), fixed investment, change in inventories, government consumption/spending, and net exports. Any one of these components can move the overall GDP number. Confusion exists when headlines target any one of these data points, without considering the others. 
• Diving even deeper into those components, the 1st quarter reduction was largely impacted by trade numbers being very low and inventories being very low, pointing to the supply chain issues we have felt, and the Covid shutdowns that existed at the beginning of the year both in the US and abroad. So those arguing that this isn’t “prolonged, pronounced, and pervasive” will say the 1st quarter deserves a mulligan for those odd and extenuating circumstances. 
• Another consideration are jobs and unemployment claims. While not reflected directly in the GDP components shared above, jobs are a key consideration in economic health and recession conversations. It makes sense that an expanding economy is one that sees job growth and job openings. A contracting economy sees layoffs and job losses. We’re at a 3.6% unemployment rate today with many open jobs still available. Historically, recessions do not “start” with this strong a job market. 

This is all context and food for thought and does not suggest that we feel we are or are not in a recession. Frankly, that doesn’t really matter to us. What does matter for us is our clients and their portfolios, and ultimately, their ability to stay the course. The markets are not disconnected from economics. But clients should remember that the market is forward looking while all this economic data is backward looking. Stay the course. Economic slowdowns are inevitable and all part of the business cycle. Asset allocation with a focus on the long-term remains our most trusted course of action for your long-term financial plan. 

Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. 

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