The 'R' Word


Although I don’t spend my life immersed in headline news as many people seem to, it’s been hard to avoid hearing the ‘R’ word recently – Recession, that is. Is there going to be one? Are we already in one? What is one, anyway?

As with many financial questions, these aren’t necessarily easy to answer. I will do my best but please remember that how people respond to a situation and, unfortunately, to those headlines, is often more important than any specific answer.

Since 1978, our economy can only be in an “official” recession if a somewhat obscure organization called the National Bureau of Economic Research says so. Founded during Ronald Reagan’s presidency, the group meets irregularly and does not issue advance notices of its meetings in hopes of keeping politics out of its declarations. Most parts of the world, and indeed the United States before 1978, use a guideline of two consecutive quarters of decline in the Gross Domestic Product as the definition of a recession. In fact, the NBER’s officially declared recessions and the classically defined ones don’t differ by much although the NBER calls the previous definition ‘simplistic and misleading’. Their approach also considers a less well publicized number, the Gross Domestic Income, which was positive during the first quarter, even as GDP was falling.

Regardless of the chosen definition, a slowing economy tends to be hard on a country’s citizens. When it slows, some people lose their jobs which cuts into the income available for spending. This tends to lead to a negative spiral of reductions in various types of production, leading to further cuts in employment. This year, however, spending has not decreased significantly largely due to the combination of (widely unspent) government payments during the COVID-related lockdown and very robust employment.

Inflation, though has increased this year, meaning our dollars don’t go as far as they once did. That said, capitalism is generally self-correcting. For example, as gasoline peaked at over $5.00 per gallon in June, people reduced the number of miles driven and the price began to fall. According to AAA, prices fell for fifty days straight to a national average that is now below four dollars per gallon (there’s a wide range prices across the country as state taxes are taken into account). That’s still higher than a year before when there were far fewer drivers on the road. Last weekend, I paid about $3.75 here in Columbus.

Who remembers seeing pictures of container ships lined-up to enter the Port of Los Angeles? Many of those ships contained items double-ordered by retailers during COVID-related manufacturing shortfalls and, in many cases, those goods have now made it to the shelves. Target is currently suffering from overly successful ordering, carrying way too much inventory. That means sale prices are in effect. This story has played-out across the country: good for consumers but bad for stores. Part of our GDP drop is related to low prices to help move inventory out of the stores. Is this a long-lasting condition? We don’t expect it to be, as the self-correcting nature of capitalism works to resolve the supply/demand equation.

The government printed a lot of money during the crisis and the Federal Reserve is responding by raising rates to slow the economy. This process is going to take some time to achieve a new balance but we believe ‘peak inflation’ is behind us and, whether the economy actually moves into a NBER-defined recession, things are slowing. There are still lots of jobs available because of a decade-long decline in workers, due largely to the retirement of leading-edge Baby Boomers. However, just as double orders of goods caused an inventory blip, we now see companies pulling back on job offers in a slowing economy.

All of this is happening during the period leading up to our mid-term elections. I’ve written before that politicians often campaign on the economy, either taking credit for its success or promising to fix it. In fact, the forces that shape it, especially globally, are far beyond the ability of a single politician to control. But the election process guarantees that the economy will remain in the news. As with most aspects of life, we suggest that after consuming the headline du jour, you pause and reflect for a bit. Taking some time to digest what you’ve heard is likely to produce a more measured response. I believe this will be better for both your mental health and your pocketbook.

As I say in at least one column per year, please try not to worry about what you read and hear – I’m pretty sure I’m worrying enough for all of us. Keeping an eye on the economy is an everyday task at WWA, one of the many ways we work to help our clients live healthier, less stressful lives.