Stagnation or not, there will be pain
When is a recession not a recession? When the recession is “rolling”.
A rolling recession occurs when different sectors of the economy collapse at different times, resulting in very low overall GDP growth. By keeping growth to a minimum and avoiding severe and prolonged economic downturn, a rolling recession is described as an official recession. Rolling slumps are also often referred to as “growth” stagnation.
“It puts the best face in a recession,” explains Kenneth Kim, chief economist at KPMG, the multinational tax and accounting services firm. There will be some growth in GDP, but it will be so low that businesses and households will feel like a recession. The Fed has not finished raising rates and will continue to do so for the remainder of this year and into early 2023.”
The Fed is hard to talk about
The term has been gaining traction and buzzing in the tongues of more and more investment managers and strategists since Federal Reserve Chairman Jerome Powell recently warned in an uncharacteristically short and directed speech at the annual Jackson Hole Economic Symposium of a “sustainable period of sub-trend growth.” As the central bank continues to focus to bring down stubbornly high inflation.
Powell dismissed the idea of a soft landing and emphasized that the Fed’s “overall focus” was to achieve price stability and achieve its 2% inflation target. Getting to this point, he said, will require more price hikes, more job losses, and “suffering for households and businesses.”
Powell’s use of the word Pain “It can be seen as a symbol of the recession,” says Liz Ann Saunders, chief investment analyst at Charles Schwab. (SCHW). “There could be a version of a rolling recession.”
“The best case scenario is for inflation to go down and the labor market to cool down and that restores the golden economy,” she says. “But this is a narrow needle of thread.”
Sonders notes that stocks are still in a bear market and economic growth is weak. At the same time, you expect corporate earnings to weaken, the housing market will continue to decline and the labor market to deteriorate as the Fed is actively working to beat inflation.
“Growth is undoubtedly slowing,” says Preston Caldwell, chief economist at Morningstar, but he is reluctant to say we’re in a recession or even to suggest what kind of recession might lie ahead. He notes that it is “highly unlikely” that the decline in GDP in the first half represented an economic recession because it was driven by “the most vocal spending component,” which was offset by other data points that showed growth. Caldwell believes that “the risk of a recession will be more concentrated in 2023, when full-year growth will bottom out.”
Stocks sell off due to Fed’s more restrictive stance
Powell’s speech led to a broad multi-day sell-off in major stock market indices, which ended in the red in August. The beginning of September witnessed continuous selling. Also weighing on the stocks were comments by Cleveland Fed President Loretta J. Meister, before the Dayton, Ohio Chamber of Commerce, in a speech titled “Return to Price Stability.”
“My current view is that it will be necessary to raise the fed funds rate to just over 4% by early next year and keep it there; I don’t expect the Fed to cut the fed funds rate target next year,” Meester said.
The US Morningstar Market Index is down nearly 4% in August, losing 4.41% in the one-week period through Thursday. It’s down 17.91% year-to-date.
“We’ve gone from the Fed to the very loving Fed,” says Adrian Helfert, chief investment officer for multi-asset strategies at Dallas-based Westwood Holdings Group, with management of about $12.1 billion. We are moving towards an extended, low-growth environment that allows for greater potential for circulating downturns within industries. This should lower the economy’s long-term real growth rate, but a sharp contraction is unlikely because consumers are doing well, have less debt and higher savings.”
Such an environment would hurt corporate earnings, Hilfert says, making stocks less attractive, but it should benefit from high-quality corporate bonds.
“The Anatomy of a Rolling Recession has been considered by his team as the economy has been in a rolling recession since the beginning of this year,” Edward Yardeni, founder and president of Yardeni Research, a provider of global investment strategies and advisory services, said at an August 30 press conference called Anatomy of a Rolling Recession. It will run through the end of the year.It indicates that real GDP declined slightly in the first half due to a lack of supply of new cars, slack conditions in the housing sector, and lower capital spending on non-residential structures in the commercial and health, energy, telecommunications, and manufacturing sectors.It tracks Capital spending based on regional business surveys conducted by the Federal Reserve’s provincial banks.
On September 1, the Institute of Supply Management released its monthly August manufacturing PMI. Yardeni said the ISM M-PMI index remained unchanged at 52.8, and its major components remained above the 50 mark, indicating expansion, providing “confirmation of our economic outlook including stagnant growth and moderate inflation pressures.”
Schwab’s Sonders says stagnation of growth or stagnation is not uncommon in modern times. But “this cycle is incredibly unique,” because of the pandemic and pandemic-related disruptions that “we are still at the mercy of,” she said.
The 10-month recession from April 1960 to February 1961 that resulted in then-Vice President Richard Nixon losing his presidential bid to John F. Kennedy is often referred to as a “rolling adjustment recession” because the downturn hit many industries at different times. The auto industry, surprised by Americans’ new preference for foreign-made compact cars, has suffered particularly as companies have been forced to reduce their inventory and shift production.
The idea of ”stagnation of growth” was first introduced by the late economist and former Director of the National Bureau of Economic Research Solomon Fabricant in 1970 to describe a period in which the economy grew slightly against a background of high unemployment, low income, and weak production. Not everyone is convinced by this concept. As the late columnist William Safire recounted in a 1984 article in New York timesThe economist Herbert Stein quipped that stagnation of growth is the equivalent of calling the dog a “growth horse.”