There has been a lot of talk in recent months about a looming recession in the U.S. economy. Coming off of an incredible bull market run over a decade long, it is not overly surprising that we should now see a downtown or even a full-blown recession. Additionally, inflation has now hit 9.1%, the largest annual increase since 1981[i]. Numbers like that do not typically bode well for the economy. Compounding the problem, is that the financial markets continue to struggle with all three major indices still down over at least 7% (as of 7/28/2022).
It is not difficult to look at this data and get the feeling that things are not going particularly well. However, the term “recession” is a technical one that many folks may not be aware of. After all, the United States has not experienced a true recession since 2008! So for many people the questions that arise are: What is a recession? How is it measured? What does it mean for me?
A recession is described as a,” significant, widespread, and prolonged downturn in economic activity.[ii]” Recessions are often characterized as times of negative economic growth, rising prices (inflation), and high unemployment to name a few economic factors. Because the economy is a complex animal, the general rule of thumb is that a recession is said to have begun once the economy experiences two consecutive quarters of negative GDP growth. It is important to note that this definition is an imperfect one as it does not capture every single financial metric. However, it is often used as the rule of thumb because recessions often last six months or more. Two quarters of negative GDP may not always mean we are in a recession but every recession shows at least two quarters of negative GDP growth.
There are some who argue that we are not yet in a recession because of the strength of the labor market. Treasury Secretary Janet Yellen recently said that she disagrees with the general rule of thumb saying, “That’s not the technical definition.[iii]” She went on to emphasize the rising number of available jobs and explained that a slowdown in economic growth is, “necessary and appropriate and we need to be growing at a steady and sustainable pace.” Others say that the White House is simply playing semantics with the term “recession” because a recession would be a political problem for the administration heading into the midterms[iv].
Regardless of whether you think the rule of thumb is accurate or not, many people are feeling the pinch of slowing economic growth and rising prices. As I mentioned earlier, the definition of a recession depends on a metric called GDP or Gross Domestic Product which is defined as, “the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period[v].” GDP takes a snapshot of the economy at a point in time which is used to estimate the economy’s size and growth. The calculation of GDP includes things like public and private expenditures, government spending, investments, and the foreign balance of trade.
So, what does all of this mean for you? Well, it certainly depends on your situation but here are a few things to keep in mind. If a recession persists and the economy struggles, expect to see continued weakness in your investment portfolio. This is not a time for panic and is, frankly, the worst possible time to panic! Continue to stay in touch with your financial advisor and stay the course with your financial plan. Now would also be a good time to shore up your emergency savings as much as is feasible. As prices continue to rise, having cash on hand is going to be a major help in paying those higher bills. Consider cutting out unnecessary subscription streaming services, eating out, and other unnecessary expenditures.
Truthfully, if you stay the course with your plan and limit your spending, most of the other problems will fall into place. You can’t control what the market is doing or how the government intervenes but you can control your own financial decisions. My advice to you is to turn off the news, focus on your own plan, and ignore the rest of the noise!
Today’s song of the week is a cover of a classic by Simon and Garfunkel. Enjoy!