Get ready for an interesting GDP readout that will be the talk of the markets for the rest of the day (and the coming sessions and weeks ahead). The first estimate of gross domestic product for the second-quarter will be reported at 8:30 a.m. ET, with most forecasts ranging anywhere from a 1% increase to a 1% decline. The stakes couldn’t be higher as annualized growth in Q1 already contracted 1.6%, meaning if the U.S. sees another quarter of negative growth it could tip into recession. Or does it?
Snapshot: “Recession” has become a charged term in recent weeks, with the phrase being traditionally identified as two consecutive quarters of negative economic growth. While that may be a technical definition (and the one that’s possibly more important to the markets), the official pronouncement boils down to a team of eight economists chosen by the National Bureau of Economic Research. Called the “Business Cycle Dating Committee,” the group has been responsible for identifying recessions, and has set the dates of peaks and troughs of the U.S. economy since 1978.
The funny thing is, that the committee generally waits quite a while after a recession has begun to pronounce it, and on occasion, even after it is already over. In the meantime, inflation is running at more than four times the Fed’s 2% target, while higher borrowing costs are expected to slow investment and many companies have already frozen hiring. Industrial production additionally fell in June, while personal consumption data has triggered a whole host of gloomy forecasts. U.S. futures are slipping ahead of the data: Dow -0.3%; S&P 500 -0.5%; Nasdaq -1.1%.
Interesting times: Since the end of WWII, there has never been a recession declared without a loss of employment (hundreds of thousands of jobs in the U.S. are currently being added every month, while the unemployment rate has fallen to 3.6%, from 4% in January). That has some economists warning of a milder “growth recession,” though the market may be fearful of something bigger. The widely followed 2y10y Treasury yield curve has remained inverted since early this month, while the benchmark S&P 500 continues to weave in and out of bear market territory.
In a similar vein to the GDP drama, economists are still haggling over whether the Fed appeared “dovish” or “hawkish” during Wednesday’s gathering. The central bank raised the federal funds rate by three quarters of a percentage point for the second month in a row – to a range of 2.25% to 2.5% – but Jay Powell’s vision of an end to the current rate-hiking cycle excited investors and triggered a stock rally during the session. According to the Fed, rates are now in the “right in the range” of “neutral” (i.e. an interest rate that neither hinders nor fuels economic growth), while Power expressed further doubt that the U.S. was in a recession, given the low unemployment rate and solid job gains.
Mixed messaging: “These rate hikes have been large and they have come quickly, and it’s likely that their full effect has not been felt by the economy. So there’s probably some additional significant tightening in the pipeline… As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how are our accumulative policy adjustments are affecting the economy and inflation.”
“We do see there are two-sided risks: There would be the risk of doing too much – imposing more of a downturn on the economy than was necessary, but the risk of doing too little and leaving the economy with this entrenched inflation – it only raises the costs of dealing with it later, to the extent that people start to see it as part of their economic lives on a sustained basis. I don’t think that’s happened yet, but when that starts to happen, it just gets that much harder and the pain will be that much greater. Restoring price stability is just something we have got to do. There isn’t an option to fail.”
Outlook: Over the past few press conferences, Powell was clearer than usual about telegraphing what lay ahead at coming gatherings, though this time around, things were less specific. “While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then,” he said at the press conference. “It’s time to just go to a meeting-by-meeting basis and to not provide the kind of clear guidance that we had provided.” That could make things more opaque going into the second half of 2022, though it is not as extreme as the ECB, which last week scrapped forward guidance “of any kind.”