Market participants have no recession playbook

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George Kessarios
Chief Economist & Fund Manager

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As most economists and analysts expected, the US economy shrank in the most recent quarter. US GDP retracted by 0.9%, after shrinking an additional 1.6% in the first quarter on an annualized rate. And while the official definition of a recession was 2 quarters of negative GDP growth, this time things are different.

Several days ago, I said that if the US economy does go into recession, it will be the weirdest recession on record. First gross corporate margins are hovering at record territory and second, US companies have record cash balances.

Today we can add the unemployment rate to things being weird. Treasury Secretary Janet Yellen said that “When you are creating 400,000 jobs a month, that is not a recession. “A recession is broad-based weakness in the economy, we are not seeing that now”. She is not wrong.

Recessions are something you usually feel. You feel it when you hear people getting laid off, when people lose their homes, and when people stop going out to eat. We are not seeing these elements in the US economy.

In fact, there is such a thing as negative GDP growth with an economy doing just fine and unemployment being very low. Japan comes to mind, but also Germany. One of the reasons for negative GDP growth is also population decline. Please note about 40% of the world economy currently has negative population growth.

Yes, housing in the US is on the decline because of affordability and high mortgage rates, however this is something secondary at the moment, but worth keeping an eye on in the future.

The bottom line is that it is impossible to make a comparison of the two consecutive negative GDP prints with previous US recessions. In addition, it is also very difficult to navigate the current inflation narrative, that is different than anything we have experienced before., primarily because it is supply side driven and not the product of monetary policy.

One can agree or disagree if the US is currently in recession, but I think most will agree that the current investment landscape is very complicated and puzzling. Most important, market participants have no recession playbook, which only adds to uncertainty and investment risk.

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