David Lebovitz:                 

Hello. My name is David Lebovitz, and I'm a Global Market Strategist at J.P. Morgan Asset Management. Welcome, to On the Minds of Investors. This week, I'd like to talk a little bit about whether or not we are already in an economic recession.

The first quarter of this year saw the US economy contract, as slower inventory growth and a growing trade deficit offset strength in consumption and investment. Recently, recession fears have bubbled to the surface, as the Federal Reserve Bank of Atlanta is now cast of economic growth now points to a contraction in the second quarter. This tracker, appropriately named GDPNow, is based on a series of rigorous mathematical techniques and uses appropriate reference data to compute weekly estimates of aggregate GDP's 13 sub-components. Real GDP is then calculated using a methodology similar to that, of the U.S. Bureau of Economic Analysis.

The latest projection suggests that 2Q real GDP will decline by 2.1%, due to a significant slowdown in consumer spending, and a contraction in private investment. This is in stark contrast to the Atlanta Fed's maximum second quarter forecast of two and a half percent in mid-bay. The Atlanta Fed's recent reading has garnered much attention, because if realized, it would indicate that the US economy has met the back of the napkin definition of a recession, two consecutive quarters of negative economic growth. Importantly however, this is a heuristic. The National Bureau of Economic Research is the official scorekeeper of US recessions. Looking ahead, we recognize that recession risk has risen. That said, it seems premature to make a call that we are already in recession today. To start the labor market remains robust, with job opening still elevated, wage growth solid, and payroll employment growing at a rapid clip.

Furthermore, many of the pain points in the economy have begun to correct themselves. Commodity prices have come off the boil, inflation looks to have peaked, and market expectations are now for the Federal Reserve to begin cutting rates in 2023. For investors, it is important to remember that markets are forward looking. Put differently, the equity market tends to peak before a recession starts, and trough before the economic data begins to improve. While risks to the outlook have risen, valuations have become more favorable, and sentiment is beginning to look washed out. This is not an attempt to call the bottom, but rather a recognition that the outlook for risk assets is more favorable today, than it was the case at the start of this year.