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Who, What, When, Where, Why, How?

July 2022 Insight

“Recession is when a neighbor loses his job. Depression is when you lose yours.”

Harry S Truman

“People stop buying things, and that is how you turn a slowdown into a recession.”

Janet Yellen

“Up until the Depression, recession had a moral character. It was supposed to purge the body economic of the greed and excess that attends a business expansion.”

James Buchan

“It’s the economy, stupid.”

James Carville

“A recession is defined as 2 consecutive quarters of negative GDP.”

Jared Bernstein/Bill Clinton

With or without the negative GDP print on Thursday, this month’s Insight was already coming together as a discussion on GDP. With two consecutive quarters of negative GDP growth, those not in power are seizing on data to shout “RECESSION” to anyone that will listen. Meanwhile, those in power, who shouted the same “RECESSION” for the same reasons when they weren’t in power, are now doing what politicians do and trying to redefine what they had previously defined. Frankly, who cares. Let them all play politics. A .9% GDP contraction isn’t the end of the world. And the origins of this article weren’t dependent on a negative Q2 reading. It is more important to understand recessions at a deeper level, to look forward at what might yet be, and to understand what that might mean to us individually. The Who, What, When, Where, Why, and How.

WHO: As this could well be the most important question of the five, I am going to defer this to the end. Having background can hep us to answer this question in a more meaningful manner.

WHAT: The most common definition of a recession is the one quoted above (by Biden’s Economic Advisor), two consecutive quarters of negative GDP. However, what is or isn’t a recession isn’t truly determined until well into the future after a recession is already well underway, and sometimes even after it has ended. The National Bureau of Economic Research (NBER) is the official arbiter in determining recessions in the United States. Raise your hand if you have heard of the NBER, and if you have, then name the person who runs the organization. Whoever’s hand is still in the air is responsible for writing next month’s Insight in my stead, because I certainly don’t know that information. The NBER’s definition, and the measuring stick which they use to make such recession determinations, is “a significant decline in economic activity spread across the economy, lasting more than a few months.” Other than the very few real time economic data models like GDP Now from the Atlanta Fed, nearly all economic data measures economic performance in the arrears. This past Thursday we received GDP data on Q2, which ended almost a month ago. But read the fine print. This was preliminary GDP estimates. The “real” number won’t be released for weeks into the future.  The NBER then takes the official numbers, and using numbers far beyond and more intricate than the high-level GDP numbers, determines whether there WAS a recession.

More philosophically speaking, recessions are a necessary and important part of the business cycle because they reallocate investment away from inefficient uses and back to those companies, entrepreneurs, etc., that have true economic stimulating activities. Or said another way, money is moved away from poorly run organizations and towards uses that have a more outsized impact on the improvement of citizen’s quality of life. Over time, the Federal Reserve has taken it upon themselves to try to keep the economy from experiencing recessions. I believe this to be severely misguided as it protects entrenched interests at the expense of innovation. Call it crony capitalism instead of free market capitalism, two very different economic models. There is a second downside to trying to avoid recessions. Like damming a river, the power of water escaping from a failed dam is far more destructive than what normal flooding would have otherwise been. This may not be the best analogy, because in modern day dams rarely fail, but economic forces are far more powerful than any river and the Fed’s economic dam building technologies are centuries behind our engineering expertise.

WHEN: Well…based on Thursday’s data release, some would say we are already there. And there is no question that many, many Americans are struggling economically. But, at least so far, those struggles are more tied to skyrocketing costs and falling real incomes (despite rising wages). The so-called working class is being crushed. Despite an economy with full employment and a huge amount of government assistance, rent delinquencies have yet to recover to pre pandemic levels. Credit card debt, indicating an inability to fund current living costs, exploded higher in the second half of 2021 and into 2022 after a steep reduction immediately after the stimulus checks were sent out in Q1 of 2021. I suppose falling real incomes could be defined as a recession for those dealing with it, but with employment having grown consistently over the past couple years, in aggregate economic activity also grew.

The more important question seems to be WHEN does economic activity (in real terms) become such that it creates real and immediate distress across a broad swath of the population. Layoffs create that kind of distress. As the current economic leaders of the country have pointed out, employment is still high, so distress is contained to a few. The argument is that we can’t be in a recession or near a recession when employment is so strong. There is one big issue with this argument. Recessions always, always, follow the peak employment of the any particular economic cycle. This is by the very definition itself. Whether employment is high or low isn’t relevant, it is the change in direction of employment that matters. When an economy reaches full employment, which is effectively where we are now, employment can’t continue to improve. And when an economy is running at its full potential, there is no where for it to go but down.

Other indicators also point to a real recession in our future. Copper, a historically strong indicator of future economic activity (and therefore given the name, Dr. Copper), has fallen 30% in two months. Copper is used in just about everything…construction, where copper usage is increasing with a move towards all electric, electric vehicles – which use four times as much copper as traditional gas vehicles, etc. A fall in prices indicates a fall in demand, or at least the expectation of a fall in demand. A reduction of demand means a reduction of economic activity.

Interest rates have spiked, pretty much putting the brakes on the residential housing market. In one of our markets (Northwest Arkansas), between the market price appreciation and interest rate increases, a person needed to realize 40% more income to buy the same property in May of this year versus May of last year. It is no wonder activity has slowed down. Additionally, the yield curve has been inverted for weeks. The average time lag between a yield curve inversion and the onset of a recession is 18 months. But that doesn’t mean we are 18 months out from the next recessions. The yield curve also inverted last year, though not as severely or for the duration we are currently seeing.  Unfortunately, this could indicate we are heading into a long recession, or a double dip recession of sorts.

Additionally, the Fed’s back-to-back 75 basis point overnight lending rate increases are unprecedented. Add it to the quantitative tightening they are doing at the same time, and the US has never experienced a tightening such as this in the history of the country (or at least the history of the Fed). Aggressive Fed rate increase have always resulted in a recession. It is just a coincidence that the economy was already contracting in Q1 prior to the Fed rate increases, or are the rate increases going to add serious fuel to the contraction fire leading to a more severe recession than most people are anticipating?

WHERE?: Everywhere. At least pretty close. And maybe not quite yet. But at least in my crystal ball (I wish!) most developed economies, and a majority of emerging economies will be dealing with recessions within the next twelve months.

WHY?: There are so many ways to go with this one. As previously alluded too, recessions are healthy and necessary, at least when part of a normal business cycle and not the breaking of the dam of government/Fed Reserve intervention. Recessions are also inevitable after the peak of a cycle. If you can’t go farther up, the only way to go is down. Economic cycles are like plants. It is impossible for them to be neither growing nor shrinking/dying.  But neither of those reasons explain the specifics of why we are either already in a recession or moving towards one (authors opinion). There are specifics to this particular situation that can be explored.

It all starts with the high levels of inflation currently being experienced. As has been referenced in media ad nauseum, we are currently experiencing the highest inflation in forty years, but that inflationary period started over 50 years ago (read more here). In the inflationary twelve-year period between 1970 and 1982 there were four recessions. The previous inflationary period at the end of WW2 resulted in a 9-month recession that saw the economy contract a whopping 11%. Before that, at the end of WW1, and non-coincidentally immediately after the Spanish Flu pandemic, the country experienced a massive bought of inflation with four years of inflation rates over 12% and pushing past 20% in 1918. This resulted in an 18-month recession with GDP falling over 6%. Inflation wreaks havoc on economies.

A tangent of inflation, though not only specific to inflationary periods, are spikes in interest rates. And spikes in interest rates also often result in economic contraction. As mentioned previously, we are staring into the most aggressive effective interest rate increase in the history of the country. I don’t see any possibility of a soft landing with the severity of the rate increases. This does not mean the Fed is doing the wrong thing in raising rates. A recession, even a deep recession, is likely a least bad option than an extended inflationary period. But whether inflation or recession, people will be damaged economically.

HOW: Inflation leads to recessions due to the volatility associated with the uneven price and wage increase process. In a simplistic example, a worker receives a big wage increase to keep up with inflation. They then feel flush and spend a bunch of money (expansion). As the months pass and goods and services continue to increase in price, that raise is stretched further and further until the worker must start cutting back on discretionary purchases to make sure they can afford the basics. This is recessionary. Then another raise (or a move to a different higher paying job) and the worker feels flush again and starts to spend. The pendulum swings back to expansionary. It feels to me that we are going into the second phase of the cycle. People are starting to realize their wage increases aren’t keeping up with the cost living and are starting to cut back on discretionary spending.

Interest rate changes, especially when they are intervention as opposed to natural, also creates volatile economic swings. Rate increases reduce liquidity causing asset prices to fall or credit to become less available (the two of which are largely intertwined). People have less wealth, which impacts their spending psychology through an inverse wealth effect or truly impacts their ability to spend through reduced equity access. Falling spending = recessionary.

WHO?: This is the most important question of all. When the media talks about recessions, it is talking about national economic activity. But we commerce in the largest economy in the world, spread across one of the largest countries in the world, in one of the most diverse economies in the world. The .9% national economic contraction experienced in Q2 does not mean all the individual states or regions of the country experienced a .9% contraction. Even in the intense COVID contraction there were a couple states that never entered recession. Some segments of the economy have seen contraction, but manufacturing, even while seeing a reduce rate of growth, didn’t see Q2 contraction. That variation of experience then trickles down to the individual. If you lived in Utah in 2020 you were much less likely to experience a personal recession than if you lived in New York City. Just like if you worked for a tech company you were much less likely to experience a personal recession than if you were a small business owner over that same time period, regardless of where you were in the country.

Maybe it is only me, but there is a propensity to be influenced by the news and what we see going on around us. We hear we are in a recession and so we change our habits. But does that mean we are really in a recession? In 2007 and 2008 I was in the middle of a massive personal recession. Many of my friends and peer group were also in a recession of some degree, and I heard of others that experienced personal recessions as bad or even worse than I did. But the vast majority of the population didn’t experience a recession at all. Maybe investment accounts fell, or wage increases slowed, but the majority of the population didn’t go backwards in terms of day-to-day ability to pay their bills. At the height of the Great Recession the underemployment rate (unemployed, marginally attached, or working part time and wanting full time work) was as high as 16%. That means over 80% of the population still had good employment.

My 2007 – 2008 recession started well before the official national recession started, and I exited my recession several quarters ahead of the national recession ended. If the country (or more specifically real estate markets) enters a meaningful 2022 recession, I may well have another personal recession. And possibly not even because things are bad, but because of reduced liquidity or throughput speed in the real estate markets. But thus far I have not experienced a personal economic contraction (once adjusted for the annual reverse wealth effect associated with April 15th).

I can’t speak to any particular reader’s economic situation, and can’t make any sort of accurate predictions about your possibilities of a personal recession. That must be done on a personal basis. But I do encourage you to consider this. If you don’t have your own recession, or even if you do and it is less severe than the economy at large, do not view a national recession as a negative. Instead view it as a wonderful environment to find outsized opportunities and rebalance your investment portfolio.

Happy Investing.

About the Author: Forrest Jinks is CEO of Altus Equity Group Inc and a licensed real estate broker. Forrest has decades of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at


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