“There are two kinds of forecasters: those who don’t know and those who don’t know, they don’t know.” James Kenneth Galbraith, Economist
Before discussing the current state of the US economy, I want to begin with the humorous quote from economist James Kenneth Galbraith, poking fun at the value of forecasts. It is a humble reminder as I write this to attempt to stick with what I know rather than what I think I know.
The U.S. economy shrank for the second quarter in a row ending June 30th. In the second quarter the economy shrank at an annual rate of 0.6%. Forecasts called for economic growth of a 0.3% increase. The 0.6% decline was an improvement over the first quarter’s decline of 1.6%. Many argue that two consecutive quarters of negative GDP growth constitutes a recession and admittedly it is a good rule of thumb to follow. However, the determination of whether the economy is in recession considers other factors and variables.
NBER (National Bureau of Economic Research) makes the official determination when a recession occurs. NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasting more than a few months.” To date a recession has not been declared but to be fair NBER makes its declaration after the recession has already started. There are several factors the bureau considers when considering the state of the economy. Further it is looking for more than one indicator to demonstrate weakness lasting at least a few months.
Let us examine the factors and the present trends. NBER considers six economic factors when evaluating the economy.
NBER Economic Factors
Real Personal Income
Real Personal Consumption
Real Manufacturing Trade & Sales
Based on NBER criteria the US economy is not in recession. Presently positive indicators outnumber negative ones two to one with three that I would categorize as neutral.
Keeping in mind the quote from James Kenneth Galbraith one could make a persuasive case that we will have a recession within the next 6 – 12 months. Interest rates are rising, inflation remains painfully high and the stock market, a leading economic indicator remains in a bear market. What is important for investors to keep in mind is the last point, the bear market, and the fact the stock market is a leading economic indicator.
The stock market has already discounted the probability for a recession. Waiting for economic storm clouds to pass before investing results in diminished returns. History has shown us repeatedly that the market will have begun its recovery while economic news worsens.
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