This morning’s GDP report noted contraction for the second quarter in a row. We can debate inventory builds and trade imbalances and the math underlying the calculation of real GDP, but the official number says negative real GDP growth for a 2nd quarter in a row and the textbook defines that officially as a “recession”.
Looking at a lot of the other data and looking at and experiencing the economy right now, it certainly doesn’t feel like a recession. Labor strength and consumer spending – still strong. High yield bond defaults – nonexistent. Airplanes full, traffic everywhere. Real GDP might have reversed for a few quarters but the overall economy (as measured by nominal GDP growth) looks really strong. If this is recession, it’s unlike one we have ever experienced before.
Financial conditions have tightened a lot and economic demand is being destroyed by these tighter conditions and higher rates. We all see that. Fed funds futures have come in (lower) 7-8bps this morning. The Fed doesn’t vote in August but the probability of just a 50bp hike in September, rather than 75bp, has increased. If the economic data continues to come in soft – and it should – the Fed could be in pause mode come October. Risk assets are waiting for that moment. The pivot in policy will come with the announcement of a “pausing”.
Chief Investment Officer
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