Is the United States already in a recession?
How's the US economy doing? Facts, numbers, analyzes and scenarios. Comment by Diana Wagner, Capital Group's equity portfolio manager
Is the US economy in recession or not? This is the question many investors are asking, given that the gross domestic product (GDP) of the United States declined for two consecutive quarters in the first half of the year, a commonly recognized definition of a recession.
However, with steady job growth, record-low unemployment and solid consumption growth, it doesn't feel like a recession most people would remember. So what is the conclusion?
It depends on the interlocutor. With food, energy and housing prices rising faster than wages, the average American consumer would probably say yes. In our view, we are either on the verge of a recession or we are already entering it.
The official recession arbiter in the US, the National Bureau of Economic Research (NBER), takes some time to deliver its opinion. The organization takes into account many factors besides GDP, including employment levels, household income and industrial production. Since the NBER does not usually disclose its results until six to nine months after the start of a recession, it is possible that the official announcement will not arrive until next year.
It's fair to say that most consumers probably don't care what the NBER thinks. They see inflation above 9%, energy prices soaring and home sales dropping. They feel the impact of this data. The job market is one of the only data that doesn't signal a recession right now.
However, these numbers reflect an imbalance between supply and demand in an economy that has not yet fully recovered from the pandemic. More job seekers are expected to return in the coming months. This should drive up the unemployment rate as companies reduce hiring.
Consumer spending, on the other hand, increased by 1.1% in June. On the surface this is a very positive figure, but adjusted for inflation it is broadly flat. It also reflects the increase in spending on essential goods, such as healthcare and housing, and hides the decline in categories of discretionary goods such as clothing and leisure.
Another worrying sign is the rapid decline in new home sales. With the Federal Reserve aggressively raising interest rates to fight inflation, mortgage rates have skyrocketed in recent months, triggering a sharp reaction in the housing market.
Purchases of new single-family homes fell 8.1% last month, the largest decline in more than two years. Sales of owned homes plunged 5.4%, the fifth consecutive month of declines. Furthermore, the sharp rise in house prices during the pandemic raises concerns about a potential and painful correction.
If we are heading towards a period of recession, the positive side could be represented by the easing of the extreme inflationary pressures recorded in the last year. In fact, some argue that inflation has gotten so out of control that it may take a substantial recession to bring it back to the Fed's 2% target.
Are we therefore in a new inflationary regime? In our opinion, no. Consumer prices are likely to drop in the coming months due to the recession and falling demand. In this case, the bond market may be past its worst, as the Fed is considering whether it can continue to raise interest rates in the face of an economic downturn. In fact, the bond market is already pricing in expectations that the Fed will cut rates multiple times in 2023.
There are many signs that inflation has reached its peak, such as the drop in prices for gasoline since mid-June, wheat, corn and other commodities since mid-May. This could give the Fed the cover it needs to sustain economic growth, while still taking inflation seriously.
Meanwhile, we expect greater volatility as the market adjusts to tighter monetary policy. For portfolios, this means moving towards higher quality investments, including US Treasuries and agency mortgage-backed securities, but also seeking opportunities in corporate and emerging market bonds, where investors are rewarded for the growing risk of recession. .
Similarly, in equity markets, identifying high-quality companies with consistent cash flows and reliable profit margins is critical to overcoming recessions. Companies with solid and growing dividends are particularly attractive.
Against this backdrop, we are bent on investing in companies whose fundamentals will hold up relatively better. Pricing power and the stability of demand are important elements.
We prefer a relatively concentrated portfolio, suitable for all seasons and able to perform in different market contexts. Our main holdings are healthcare, software and insurance companies. We are also looking at consumer goods, but you have to be very selective in this area as some valuations have gotten quite high.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/gli-stati-uniti-sono-gia-in-recessione/ on Sat, 20 Aug 2022 06:23:34 +0000.