The US economy is showing signs that the post pandemic surge is beginning to moderate, but we do not think a recession is imminent. Nonetheless, stocks are near correction territory, consumer sentiment has soured to levels last seen in 2011, geopolitical tensions are elevated, and prices are higher everywhere; all of which challenge this view. To address this, investors should first understand what constitutes a recession and, importantly, how current conditions and trends shape the investment outlook.
One common definition of a recession is two consecutive quarters of negative GDP growth, however, the National Bureau of Economic Research (NBER)—the official scorekeepers for recessions and expansions— define a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months…these include real personal income less transfers, nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, employment as measured by the household survey, and industrial production”.
Utilizing this more expansive definition, incoming data shows:
- Monthly nonfarm payroll growth has averaged over 550K in the past 6 months, signaling very strong demand for labor and a robust job market
- Real personal income excluding transfers fell 0.3% m/m in in March but is 1.9% higher relative to a year ago and 1.2% higher relative to the pre-pandemic peak
- Real consumer spending expanded 0.2% m/m in March as consumers continue to shift from buying goods to paying for services
- Industrial production rose 1.1% in April, aided by a 0.8% increase in manufacturing output
Given this, the signal is clear: the economy is still firing on all cylinders and we are not in a recession. Moreover, looking at an even broader heatmap of economic variables (red = contracting, yellow = neutral, green = improving) across corporate profits, labor and activity, the evidence suggests the economy continues to expand healthily, albeit at a slower pace after roaring out of the pandemic. While the Federal Reserve is keen on bringing down inflation, a more cautious approach could allow for a soft-landing next year, suggesting risk assets may be oversold at this stage.
That said, recession risks are rising as we look ahead to 2023: inflation could remain stubbornly high, pushing the Federal Reserve to overtighten policy; the fiscal drag this year is likely to slow economic momentum, and a lack of labor supply will likely weigh on growth. For those investors who may be less confident in the Fed’s ability, bond yields have shot higher this year creating a decent portfolio buffer in the event of market and economic downturn.
U.S. economic heatmap
Source: BEA, BLS, Department of Labor, Census Bureau, Standard & Poor’s, Institute for Supply Management, FactSet, J.P. Morgan Asset Management. S&P 500 EPS (earnings per share) and SPS (sales per share) are expected earnings and sales per share growth over the next 12 months.
Guide to the Markets – U.S. Data are as of May 17, 2022.