Recession in 2022? Here's why the risk remains "relatively low"
May 23, 2022
By Jonathan Smith
With prolonged inflation, lingering COVID-19 effects and fallout from the Ukraine conflict, many Americans have begun to speculate and fear that a recession may be next. However, there are some positive U.S. economic indicators to consider, which tell us that the sky is not falling yet.
What is a recession?
A recession is a significant decline in general economic activity spread across the economy in a designated region. It is typically recognized as two consecutive quarters of GDP (Gross Domestic Product) decline. However, the NBER, National Bureau of Economic Research — an organization that officially declares recessions — says this is a flawed calculation. The NBER defines a recession as a significant decline in economic activity lasting more than a few months with effects visible in real GDP, real income, employment, industrial production, and retail sales.
What are the recession risks?
One of the key indicators of measuring a possible recession is GDP. In the first quarter, we saw GDP shrink at an annual rate of 1.4%. A negative quarter of GDP to start the year would suggest that the economy is shrinking. Another measurable factor is high inflation. In April the CPI (Consumer Price Index) rate was 8.3% year-over-year, which is much greater than the Federal Reserve’s target rate of 2%. Higher prices are outpacing wage growth, making cost of living standards very expensive for Americans. The Federal Reserve is focused on cooling inflation by raising interest rates to discourage spending by making borrowing costs more expensive. The ability of the Fed to deliver a “soft landing” for the economy by raising interest rates without causing major shocks to unemployment will be something to monitor moving forward.
What are the positive indicators?
First, a positive sign in the economy that makes this cycle different from past recessions is the fact that job numbers and employment remain strong with a very tight labor market. Second, consumer and business spending remains robust through the high inflationary environment. Third, consumer balance sheets are in good shape. Finally, there is evidence that inflation is starting to peak and shift toward slowing down. These factors display that the U.S economy is still in good shape with a lower threat of a recession in the near future.
What it means for you:
How is Security National Wealth Management team managing risks in this uncertain environment? Our strategy is to continue to remain fully invested, lowering the price risk by reducing duration with fixed income. In this high inflationary environment, we have taken steps to be more value oriented over growth for a defensive posture. Our team is disciplined in our approach, focusing on your long-term goals. Contact us and we will review your goals together, making sure you are still on track. Your financial success matters to us!