When does recession officially begin?
Is there a date for when a recession is said to begin?
Introduction
Throughout this week, investors are extremely fearful and markets are bloody. The S&P500 is down 5%, and NASDAQ is down almost 6% as well. Crypto markets have taken a huge hit too, with BTC down 7.3% and ETH down a whopping 18.46%.
Part of the reason why there was such a huge sell off was due to the most recent release of Consumer Price Index (CPI) data. According to the US Bureau of Labor Statistics, the CPI for May rose 1%, reaching 8.6% over the last 12 months, the highest since 1981.
To make matters worse, media outlets are reporting news of recession incoming with their fear-inducing headlines.
That got me wondering (and also Cardi B actually), when does recession officially begin? Is it a gradual ongoing process where people slowly realize that they are in a recession? Or is there an actual verifiable date where we can determine that we are in a recession?
Recession
Before continuing, I believe it is important to define the meaning of a "recession".
A recession basically means a period where there is a significant decline in general economic activity. It is typically recognized as two consecutive quarters of economic decline, as reflected by the GDP.
To break it down even further:
Quarters = Blocks of 3 months
GDP = Gross Domestic Product, a measure of market value of all the things a particular country makes per year
So to reiterate, a recession happens when we experience negative GDP for 2 quarters (which equates to 6 months).
Now that we got that out of the way, there is actually a website that shows these GDP reports, in the form of 3 estimates. Introducing the U.S Bureau of Economic Analysis (BEA), which provides official macroeconomic and industry statistics of the U.S.
Advance Estimate
Measuring the GDP for the entire country is extremely difficult, hence the reason for 3 estimates, with each estimate being (hopefully) more accurate. The first estimate, also known as Advance Estimate, is the one that people pays the most attention to as the BEA spent the most time gathering the data.
The Advance Estimate is typically released 4 weeks after a quarter ends.
For example, for the 1st quarter of 2022 (Jan - March), the Advance Estimate is released on April 28th 2022. In that report, it stated that the GDP is -1.4%, signalling an economic decline.
This scared investors and they started to sell off their stocks, real estate and crypto etc.
Second Estimate
The Second Estimate, released on May 26th 2022, reported an updated value of -1.5%, further scaring investors into selling off.
By the Second Estimate we can comfortably conclude that the U.S is experiencing negative GDP for the 1st Quarter of 2022 (Jan - Mar).
Third Estimate
The Third Estimate will be released on June 29th, 8:30AM EDT. Personally, I believe that the GDP will remain negative, which may signal an even more bearish market.
Next Advance Estimate?
However, this GDP report does not signal to us that we are in a recession. As mentioned, a recession happens when there are two consecutive quarters of economic decline. What this means is, we will officially be in a recession if the 2nd Quarter (Apr - Jun) has a negative GDP.
When is that?
Mark the date, the 2nd Quarter 2022 Advance Estimate report will be released on Jul 28th 8:30AM EDT.
That will be the Judgment Day that will tell us if we are officially in a recession. If it reports a negative GDP, we are in a recession. If it reports a positive GDP, the counter resets and we will have to observe the Third Quarter and so on.
2nd Quarter GDP?
This begs another question, how likely are we getting a negative GDP for the 2nd Quarter?
TLDR: No one knows.
On one hand, following the standards of the National Bureau of Economic Research (NBER), the -1.5% decline for this year's quarter pales in comparison to the -31.2% plunge seen through the second quarter of 2020. Consumer spending, which makes up about two-thirds of GDP, grew at 2.7% annually, and business investments expanded 9.2%. Inflation may be sky-high, but spending at retailers and restaurants rose to a record $677.7 billion in April. Despite some layoffs at high-profile tech companies, unemployment rates are still near pre-pandemic lows (3.6%)
On the other hand, Elon Musk has a "super bad feeling" about the economy, paused hiring and cuts 10% of Tesla's jobs. Netflix and Robinhood have also started to do the same. Coinbase, a cryptocurrency exchange, has also frozen new hiring and even rescinded some already-accepted job offers. The Michigan Consumer Sentiment reading tanked 14% in June as compared to May, and Google searches for the word "recession" have risen four-fold since February.
Consumer sentiment play a role here as it kind of serves as a self-fulfilling prophecy. When enough people believe that a recession is coming, they start to spend less. As mentioned, two-thirds of the GDP comes from Consumer Spending, hence lesser spending may inevitably lead to the decline in GDP.
Conclusion and Personal Thoughts
These may be scary times for investors, but as Warren Buffett once said, "Be fearful when others are greedy, and greedy when others are fearful".
As a long-term investor, I will continue to be invested in the markets and carry on dollar-cost-averaging into index funds and crypto (BTC and ETH).
One of the key takeaways will be the date July 28th 8:30AM EDT, as this will be the official date where we will all know if we are in a recession. *fingers crossed*