- The National Bureau of Economic Research will not declare the US economy is in a recession, according to Raymond James.
- US GDP growth has contracted two quarters in a row this year, which is the technical definition of a recession.
- But a strong jobs market suggests the official arbiter of whether the US economy is in a recession will stay quiet.
A debate has been raging among investors as to whether or not the US economy is in a recession. According to investment firm Raymond James, the answer is no, it is not.
A technical recession is defined as two straight quarters of negative GDP growth, but the US economy is not officially considered to be in a recession until it is declared so by the National Bureau of Economic Research. The NBER holistically looks at the broader US economy to make its recession determination and can make its decision months after the recession started or ended.
Supporting the idea that the economy is in a recession is the fact that first- and second-quarter GDP growth fell this year, albeit by a small margin and with some important nuance. First-quarter GDP growth fell 1.6%, while second-quarter GDP growth fell 0.9%.
Still, “the economy is not in the jaws of a recession,” Raymond James’ chief investment officer Larry Adams told clients in a Friday note. “We doubt the official arbiter of recessions, the NBER, will declare the economy is in a recession for two reasons.”
Those reasons include a strong jobs market and the impact business inventories have had on GDP growth so far this year.
1. “A Habitat fit for survival.”
“When it comes to our rationale as to why we are not [in a recession], we’re in agreement with the Fed — look at the labor market! The three-month moving average of job gains is ~375,000, nearly 4.5x the historical average of ~80,000 jobs added at the start of a recession. The unemployment rate of 3.6% would be the lowest at the start of a recession since 1969 and the third lowest in the post-World War II era,” Adams said.
Meanwhile, industrial production is on the rise and durable orders saw a considerable acceleration in June, Adams added.
2. “Inventories took a bite out of GDP.”
“For the second quarter, a reduction in inventories alone caused a 2.0% detraction to growth. Is this such a bad thing? Inventories being worked down to more normal levels is a sign that consumers are still buying. Government spending retreating from record levels during COVID should not be a surprise and is likely to become less of a drag as we move further away from the fiscal stimulus programs,” Adams said.
Adams ultimately expects the economy to return to sub-trend growth mode in the third- and fourth-quarter, easing investor fears that the economy is in a recession. The confidence from Raymond James stems from the view that the ongoing decline in gas prices can shift the tide in sentiment, earnings are not tanking, and good and services spending remains strong.