U.S. Recession Already Six Months Old, Says Fed Model

The prospects of a U.S. recession have been rising throughout 2022 as the Fed committed to rate hikes and the yield curve inverted in March. Stocks, now in a bear market, had their worst start to the year since 1970, and inflation has hit 40-year highs. The economic news has not been good.

Q1 2022 GDP growth was negative, suggesting a recession may have started. Now, the Atlanta GDPNow model signals Q2 growth may be negative too. If that forecast holds then the recession that seemed likely on an 18-month view, may be here already.

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How The Forecast Works

We won’t see the first estimate of Q2 GDP until July 28. However, computing GDP is hardly a secret. It involves combining different the components of economic activity such as consumer spending, business activity and trade.

Many components of GDP for much of Q2 have already been reported. For example the numbers for two of the three months of Q2, April and May, are largely in the books already and June data is coming in now.

The Atlanta Fed GDPNow model is tracking this data, and it looks bad. At the time of writing, roughly a -1% decline in GDP for Q2 is on the cards. Of course, that forecast may change, but unless some upcoming numbers improve, it may mean that we’re already 6 months into a U.S. recession.

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Recession Drivers

Each recession is different, but if we are in a recession currently it will likely be caused by declines in business spending, investment and perhaps trade flows. That helps reconcile robust unemployment today, with the high chance of recession. The U.S. consumer is holding up ok, for now, but businesses cutting back on expenditures may be enough to shrink economic activity as the swings can be so large.

Given that our two most recent recessions are the financial crisis and the start of the pandemic, both of which were pretty severe, it is quite possible that this coming recession may be milder than recent recessions.

Other Metrics

The Atlanta Fed model isn’t out on a limb here. Plenty of other metrics with robust recession-predicting credentials from the stock market to Google search activity point to recession. The consensus is building that a recession is on the cards. What’s unique about the Atlanta Fed’s model is that it’s pointing to a recession right now.

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However, the model only suggests a decline in Q2 GDP of about 1%, so it’s possible that upcoming releases move it into positive territory or that the model is simply wrong. It’s also merely a model that that the Atlanta Fed maintain, so it’s a data point, rather than any blessed, official position from the Fed.

Priced In?

It’s also worth noting that given the recent dire performance of many stocks and bonds, a recession shouldn’t come as a big surprise. Indeed, the stock market has gone at least some way to pricing in a recession at this point. The markets have swung from greed to fear. So even though a recession may be here, that may not be quite the bad news it seems for investors, given recent extreme weakness in financial markets. The recession may already be here, but also perhaps is the market’s response to it.