“People are preparing for the fact that we’re already in a recession or that we’re very likely to be in a recession soon,” said Hady Farag, partner and associate director of the Boston Consulting Group.
The Federal Reserve will need to keep inflation fears in mind as it tries to balance aggressive rate hikes with concerns that tightening too much will sap growth.
The Fed is expected to hike rates another three-quarters of a percentage point this month after making a similarly outsized move in June.
“The word recession casts a long shadow on markets, but in a way the only way out of this inflationary environment is for central banks to trigger this recession,” said Mabrouk Chetouane, head of global market strategy at Natixis Investment Managers Solutions. in a report this month.
Against this backdrop, investors need to prepare for the downturn that appears to be underway, and policymakers need to prepare for a slowdown in growth…or worse.
The US economy contracted in the first quarter and investors are eagerly awaiting Thursday’s gross domestic product report to see if GDP contracted again in the second quarter.
While two consecutive quarters of negative numbers is the common understanding of a recession, it’s not the official definition.
A group called the National Bureau of Economic Research is responsible for officially declaring the beginning and end of the economic downturn — and the NBER has typically waited several months before making decisions about recession dates.
Treasury Secretary Janet Yellen said in an interview aired on NBC’s Meet the Press on Sunday that a recession is “a broad-based contraction in the economy that affects many sectors,” adding that she would be “surprised” if the NBER were to say the economy is now in recession.
But you can probably expect plenty of recession headlines and policy talk this week if the second quarter GDP report is bad.
Not all recessions are the same
“A recession is not our base case. We continue to expect the economy to slow significantly but avoid a recession in 2022,” said Katie Nixon, Northern Trust Wealth Management’s chief investment officer, in a recent report. However, she added that “it’s still possible that the technical definition of a recession will be met.”
Farag of the Boston Consulting Group also pointed out that even if the economy has already slipped into recession mode, that doesn’t mean a downturn will be as long and painful as some previous recessions. He said most investors don’t seem to be expecting a repeat of the early 1980s or another major recession like 2008.
“No two recessions are the same. I don’t think people are very concerned about a major recession or massive stagnation,” he said.
It’s also worth remembering that in the event of a recession, the Fed could quickly change course and cut rates again to try to restart the economy.
That’s exactly what the central bank did after a series of rate hikes in 1999 and early 2000, just as the dot-com boom was bursting. But when the economy slipped into recession in 2001, the Fed cut interest rates 11 times that year.