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August 5, 2022 | The Official Recession Label Will Come Much Too Late To Be Useful

Hilliard MacBeth

Author of "When the Bubble Bursts: Surviving the Canadian Real Estate Crash"

The probability of recession in the U.S. is high. The popular definition of recession — two consecutive quarters of negative growth — has already occurred. But there is no official declaration of recession, yet.

Why the delay in calling a recession?

Some people argue that a U.S. recession has started. The test of two consecutive quarters of negative growth has already been met. The first quarter growth was minus 1.6 percent, and the second quarter reading was minus 0.9 percent. In the second quarter, ending June 30, the goods component was in deep negative growth at -4.4 percent, while services grew at 4.1 percent.

But that is not a recession, officially. The GDP is calculated by the U.S. Department of Commerce, but it does not have the final say.

The National Bureau of Economic Research is responsible for defining a recession and it does not use the “2 quarters of negative growth” definition. The NBER definition is more complex, taking into consideration many factors. A group of eight academic economists are saddled with the task of declaring an “official” recession.

Based in Cambridge Massachusetts, this group examines many indicators in their work as the Business Cycle Dating Committee (no, not that kind of dating). That committee, first convened in 1920, is led currently by a 78-year-old Standford University professor and has taken as long as a year after recession onset to decide if a recession occurred. Wall Street nearly always recognizes a recession before the NBER official announcement. The committee doesn’t even hold regular meetings.

The committee is looking for a “substantial decline in activity over a sustained period of time.” The data used include monthly reports on real personal income, nonfarm payrolls, personal consumption spending, manufacturing sales and industrial production.

The committee is highly respected as it has been unaffected by politics in making a recession call. The members are independent of government, although some committee members have advised previous government administrations. It is likely that no recession call will be made before the November elections.

In 2008 Fed chair Ben Bernanke said that people should not get hung up on the technical definition of a recession.

The official declaration of recession is never helpful as a warning signal. Those pronouncements come much too late. Stock market downturns usually anticipate recessions, by as long as nine months. And the NBER can take a year to act after the recession begins.

The U.S. is affected by the world economy. The downturn in China is gaining momentum. The trouble in the property sector, starting with China Evergrande and spreading to other developers guarantees a serious slump there. Germany may already be in recession as natural gas deliveries from Russia have been cut back. The U.S., China and Germany combined make up about one-half of the world’s GDP.

With central banks all over the world hiking interest rates a substantial slowdown in activity is a certainty.

Waiting for a committee to use the r-word is not a good investing strategy.

Hilliard MacBeth

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances.. Richardson Wealth is a member of Canadian Investor Protection Fund. Richardson Wealth is a trademark by its respective owners used under license by Richardson Wealth.

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August 5th, 2022

Posted In: Hilliard's Weekend Notebook

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