Why I Believe The Recession Has Already Begun

Why I Believe The Recession Has Already Begun

by David Reavill

It’s the question I’m most often asked: “how will we know when a Recession begins?” Times are tough for many. Everyone can feel that this economy is struggling. The one-two punch of rising prices and uncertain salaries puts everyone under the gun. We have reached the highest level of financial anxiety since the 1970s.

So, how will we know when we’ve reached Recession?

First, let’s get a working definition of just what a recession is. The technically correct answer is: whenever the National Bureau of Economic Research says so. You see, the NBER is our national arbiter of recessions.

Like the umpire behind the plate in baseball, the NBER calls the balls and strikes. They declare whether a period meets their criteria for recession.

As a general rule of thumb, the NBER will declare a Recession when the economy contracts for two consecutive quarters. Our best “big picture of the economy is the Gross Domestic Product. So if GDP is down for two quarters in a row, you can bet it will be declared a recession.

Interestingly, however, just a couple of years ago, the NBER declared the second quarter of 2020 to be a recession all by itself. Even though it technically lasted for just one quarter. The economic disruption was just that severe.

Now the first quarter of this year saw GDP drop by 1.6%. So we’ve got one quarter already in the bag. We’re halfway to that Recession call. We will get the first estimate for the second quarter in about three weeks.

I believe we are already in a Recession, as my regular readers know. A Recession began during that first quarter of the year and continues now.

Just as last quarter ended last Thursday, the GDP Now has also been flashing red. Backing up that estimate has been the GDP Now Model, created by the Atlanta Branch of the Federal Reserve. Their assessment is also at the Recession level.

But that is all in the technical world of models and mathematics. However, it is the real world that is showing us the more compelling case for a Recession.

Generally, Recessions begin with what economists call “demand destruction.” Simply put, people run out of money and stop buying.

And not just ordinary consumers like you and me, but also large corporations. Big business stops making new purchases when their cash flow gets tight, and their projection of future sales starts to lag.

One of the ways that those large American Corporations became successful has been their remarkable ability to budget. Knowing just how much inventory to purchase, and projecting just when it will like sell, has been a key to its profitability.

The lingering supply chain mess disrupts corporations’ ability to stock up on inventory.

There is some indication that American businesses may have over-compensated, purchasing too much inventory. If true, then companies can hold off on additional purchases right now.

And that looks like just what may be occurring. The world’s most extensive shipping measure has declined for the third day. With shipments of coal and steel especially hard hit.

Yesterday we saw this demand destruction across the entire futures markets as nearly all the day’s commodities were trading lower. We’ve talked about the lumber market, how that implies reduced construction in the future, and how copper has been used as a bell weather for years to predict future manufacturing. And yesterday, we saw aluminum, a primary industrial metal, trade at a one-year low. So across the board, the industrial commodities traded lower yesterday.

Joining this downside swoon was the energy sector, up to now the hottest of the futures pits. And a significant reversal from earlier. Oil seemed to find no bottom yesterday, as I saw crude down by 9% or better.

And with the drop in crude price came lows in propane, gasoline, and heating oil. No doubt, this will be seen as a welcome relief for Americans. But it is also a sign of “demand destruction” from the energy sector.

Finally, one last indicator, my least “scientific.”. I live next door to a wonderful Pennsylvania Park. One of those extensive stretches of forest that goes for miles. A place where people can camp, fish, hunt, and hike. The perfect place to go for a Fourth of July weekend.

In the five summers I’ve lived here, this was the fewest visitors for any significant holiday ever. Even during the Pandemic, people would come for a place to get outside and not have to wear a mask. But this Fourth of July, the Park was nearly empty.

Many were unwilling to pay the high gas price to travel to my Park. As discussed in Friday’s column, more people opted to stay home.

That’s the ultimate form of demand destruction. And a pretty good indication that the Recession has already begun.

Economic News

At 2 pm eastern time, the Federal Reserve will release their Open Market Committee Minutes from the meeting on June 14 -15. This may mark the point at which the Fed was the most hawkish. If you recall most of the Fed governors, at that point, were in agreement to hike interest rates and fight inflation. In June, the question wasn’t whether to raise rates, it was how far should they raise rates.

My guess is that some of that rate-hiking fervor will start to diminish as we see the economy deteriorate. The next meeting for the Open Market Committee will be on the 26th and 27th. It will be fascinating to watch how the committee moves away from its June hawkish position, toward more accommodation.

A little later this morning we will get two measures of the Purchasing Managers. First from Standard And Poors and then from the Institute for Supply Management. Both are expected to show slight declines in Purchasing Activity. However, both are still expected to remain in positive territory, above 50 on their respective indexes.

Also reporting today will be the Bureau of Labor Statistics’ latest report on Job Openings. And for the fifth month in a row, this report is expected to show that there are more than 11 million jobs available, but not filled. This is a trend that continues, and we’ll have much more to say about this in a future article.

In earnings today, it’s a very light calendar in this holiday-shortened week. The only major company reporting today is Simulations Plus, a software support company for the Pharmaceutical industry. Simulations Plus will report later this afternoon.