The Last Hurrah?

Most investors we talk to think the US is already in a recession or that a recession will start by the end of 2022. We think they’re wrong on both counts.

Yes, we are fully aware that the reports on real GDP growth for the first two quarters of the year were negative. But, as economists, we are also aware that the GDP reports will be revised once a year for the next several years and are confident they will ultimately show positive growth. Why? Because the unemployment rate has dropped, payrolls have grown at a very rapid pace, and industrial production continues to climb.

Don’t get us wrong; we’re not “recession deniers.” We think a recession is coming because monetary policy will have to get tight enough to bring inflation back down and a monetary policy tight enough to do that is also likely to drag the economy into a recession. We’re just not there yet. We expect a recession to start in the second half of 2023, with some risk of it starting in either the first half of 2023 or first half of 2024.

In the meantime, as set out below, our calculations show economic growth at a 3.0% annual rate for the third quarter, which is probably going to be the fastest growth we see for any quarter from now until the next recession is done.

Consumption: “Real” (inflation-adjusted) retail sales outside the auto sector declined at a 1.4% annual rate in Q3 while sales of autos and light trucks slipped at a 0.4% rate. However, it looks like real services, which makes up most of consumer spending, should be up at a solid pace. Putting it all together, we estimate real consumer spending on goods and services, combined, increased at a modest 1.0% rate, adding 0.7 points to the real GDP growth rate (1.0 times the consumption share of GDP, which is 68%, equals 0.7).