What All the Recession Talk Really Means
If you’ve been following along here over the past year, I won’t have to remind you that I have no problem telling it just like it is.
And that includes the good news — and the bad news — about Bitcoin (BTC), cryptocurrencies in general, stocks, and the economy. You name it and I try to be upfront and transparent.
In fact, in last week’s issue I gave you the grisly details behind the sell-off in just about every asset class. In gory detail, I showed you how much every major stock index was down for the year. I then showed you how Bitcoin was a member of that dubious club.
I also got under the hood of what I consider to be the biggest factor right now that is hammering stocks and Bitcoin: Inflation.
The fact is inflation is at nosebleed levels and it’s got just about everyone in a tizzy. And with good reason: Inflation eats away at incomes and makes products and services super-expensive. And since inflation now stands at multiple decade highs, you ignore it only at your own peril.
But as bad as inflation is, I have to remind you that down deep what really makes investors nervous is not inflation itself but the tool-of-choice that gets used to fight it: Higher interest rates.
Why don’t investors like higher interest rates? While higher interest rates do tend to work, they are a blunt instrument. They make all interest related costs higher. And that can make businesses and consumers cut back on spending that makes our economy hum. As a result, right now investors think that could lead to a recession.
That’s right: Behind all this inflation hysteria is the fear that a recession will take hold and really give the economy a blow to the chin. So, is a recession in the cards? Let’s see.
What is a Recession?
In a nutshell, a recession is a slowdown in economic activity. In real life terms, that usually means that during recessions businesses don’t expand and grow as much as they were prior to the recession. And that can mean that they pullback on investing in new equipment or factories or engaging in new projects. It can also mean that they put the brakes on hiring. Recessions can also mean that consumers don’t spend as much. And that can translate into lower demand for just about every kind of good and service.
If you’re looking for a more technical definition, here goes: In the past, a recession was defined as two consecutive quarters of negative growth or contracting output. But these days the National Bureau of Economic Research (NBER) — the arbiter of recession-related data and analysis — says that the definition of a recession is a bit more nuanced:
“The NBER’s traditional definition of a recession is that it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months. The committee’s view is that while each of the three criteria — depth, diffusion, and duration — needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.” Source
Economic expansion or contraction is usually measured by Gross Domestic Product (GDP). And a good back-of-napkin definition of GDP is the sum value of all goods and services produced in the U.S. during a specified period, usually a quarter. These goods and services include those that are produced for sale in markets and those that are provided for non-markets, such as government spending for education and defense.
GDP numbers are typically quoted in annual terms. So, 5% GDP during the fourth quarter means “during the fourth quarter the economy grew at a 5% annual rate.”
Are We in a Recession Now? Not Quite
If we take the old definition of recession — namely two consecutive quarters of contraction — are we in a recession right now?
Not quite. But we’re close. See for yourself:
As you can see from this chart, the U.S. economy contracted at an annual rate of 1.4% during the first quarter of 2002. And if you dig into the report, you can see that investment, exports, and government spending all took a dive. And compared to the 6.9% annual growth booked in the fourth quarter of 2021, the first quarter was a big miss.
But here’s the truth behind these numbers: Recessions are a natural part of the business cycle. And that means that they provide much-needed time for the economy to take a breather and cool-off. In fact, recessions can give businesses and consumers a chance to figure out what’s ahead without the constant burden of growth.
Plus, in general recessions don’t last that long. In fact, the last recession lasted just two months between February and April in 2020. And when you hold up recent recession compared to their neighboring expansions, they pale in comparison: The recession of 2020 followed an expansion of over 10 years.
But the fact is we’ve gotten so used to constant expansion — the oppositive of a recession — that we’ve forgotten that they’re a part of economic life. And that has caused investors to sell just about everything in sight, including stocks and Bitcoin. But the numbers simply don’t support that kind of selling. At least not yet.
Check it out!
This post first appeared on INO.com, which is kind enough to permit us to repost here.
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