Textbook recession


GDP (the measure of economic growth) fell in the second quarter by 0.9%, following a 1.6% decline in the first quarter. Two consecutive quarters of negative GDP growth is the textbook definition of a recession, but the official declaration of a recession comes from a committee that deliberates on the topic and likely won’t make an announcement on the matter for a few months.

Moral of the story: Most economists actually don’t expect the committee to consider this an official recession because some of the things impacting this quarter’s negative print (like inventory levels) were more volatile and one-time items than indicative of something more structural. That being said, investors are broadly expecting to hit a true recession by the end of this year or into next year. Given this was already somewhat baked into expectations, stocks didn’t really react to this negative report. In fact, stocks posted another positive week this week.


The Federal Reserve held its July meeting this past week, and as expected, increased policy interest rates by another 0.75% for the second month in a row, bringing benchmark rates to 2.25-2.5% in an effort to combat inflation. Remember this rate was near 0% a few months ago – and this increase is flowing through into the interest rates being charged for mortgages, auto loans, credit cards, etc. and impacting consumers pretty directly in addition to creating a pretty bad few months for stocks. The central bank has been looking for consecutive data indicating that inflation is softening before easing off the gas pedal on interest rate hikes, and the very early indicators are starting to show. Meanwhile, their favorite indicator of inflation (the PCE Index) came in at 6.8% in June, its highest level since January 1982.

Moral of the story: Fed Chairman has said the central bank and strongly committed to bringing down inflation, even if it comes at a cost to economic growth and the strong labor market. Despite being in a “textbook definition” of a recession now, the labor market, though showing some initial signs of weakening, is still pretty strong. There are still 2x the number of job openings as there are people looking for jobs, and wages are still rising fairly rapidly, which means the Fed still has some more room to run on their monetary tightening policies (raising rates).

Earnings so far

We’re a little over halfway through earnings season at this point and are still seeing the same types of trends that we were seeing last week. Of the companies that have reported so far, 73% of them have reported results ahead of expectations (that were kind of low) and indicating an average growth rate of 6%, which is the lowest we’ve seen since the end of 2020. But that growth rate is being brought up by the energy sector seeing over 200% growth, compared to five other sectors showing negative growth. Results were a pretty mixed bag in terms of actually drawing broad conclusions – companies like Walmart slashed expectations and reported weak results (which would typically point to a weakening consumer) but others like Apple, Amazon, and Chipotle posted banner results as consumer demand continued in the face of higher prices.

Moral of the story: So far, to me, earnings are indicating a tale of two cities as it relates to the strength of the consumer and the economy overall. The lower-end consumer is getting squeezed hard by inflation and suffering. The higher-end consumer is still managing. The unfortunate thing about this is that we’re seeing the wealth disparity in this country get worse. I have no doubt in my mind that this means the November mid-term elections are going to be a big deal as policymakers have failed to really make much of a difference yet.

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