Months of rising inflation, higher interest rates, and slowing growth have left politicians, economists, investment professionals, and ¬— most important — your clients asking the same question: Are we in a recession?
The answer depends on who you ask and how you define recession.
Federal Reserve Chair Jerome Powell said in August that he does not believe the U.S. economy is in a recession, citing “too many areas of the economy that are performing too well.” Powell noted a strong labor market as one indicator. He made the comments at a press conference following the central bank’s announcement that it was raising rates 0.75 percentage points for the second time to help fight inflation.
Those who subscribe to a more general definition of recession — two consecutive quarters of negative gross domestic product (GDP) — may have a different opinion. By that measure, the U.S. entered a recession in the summer of 2022. Real GDP decreased at an annual rate of 1.6% in the first quarter of 2022 and by 0.6% in the second quarter, according to the Bureau of Economic Analysis.
The National Bureau of Economic Research (NBER), the nonprofit organization that tracks the business cycle, defines recession as a significant decline in economic activity that is spread across the economy and that lasts more than a few months. By its definition, the U.S. economy was not in recession as of the summer of 2022.
While economic professionals take one view of what defines a recession, the American public has its own ideas. Many people are feeling pain in the pocketbook that makes them believe a recession is here or is on the horizon. The July Harvard CAPS-Harris Poll found that 84% of registered voters believed the U.S. economy was in a recession or that it would soon enter a recession.
While Chair Powell said he didn’t believe the economy is in recession yet, he indicated that cooling inflation would “bring some pain” to Americans through layoffs, weaker pay growth, and higher borrowing costs. Powell recently said in an interview that the Fed would not go as far as efforts in the early 1980s that resulted in a deep recession and sharply higher unemployment.
However, some critics see the Fed’s moves increasing the likelihood of a growth recession, a period of slow economic growth and higher unemployment. Powell said the hope is to achieve “a period of growth below trend, which will cause the labor market to get back into better balance” and bring wages back in line with a target of 2% inflation.
Whatever definition of recession you subscribe to, you need to be prepared to help clients navigate what is likely to be a rocky road of rate hikes, inflation, and more.
FundVisualizer can help you:
- Ensure that portfolios are diversified to withstand economic changes
- Identify sectors and investment types that may be more recession or inflation proof
- Explore new investments and sectors for opportunities as the markets prepare for recovery
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