The United States has been in a recession in 2022. It just needs to come with the mysterious * to be safe. The media, politicos, and the financial services giants have basically been maintaining that the economy remains healthy but that there are recession risks ahead. Keep in mind that every single recession is different.
The recession that was arguably seen in 2022 was far different from the 2020 COVID-19 pandemic. It was much different than the global financial crisis more than a decade earlier. This was the simple definition of a recession being two quarters of GDP contraction. Blame Russia, blame the Fed, blame inflation, blame earnings. It was different. With a reported U.S. gross domestic product (GDP) growth rate of 2.6%, after two consecutive quarters of contraction, it would be easy to argue that the recession is over or that there was no recession to begin with.
The classic definition of a recession was two consecutive quarters of negative GDP. That is no longer the case according to the National Bureau of Economic Research (NBER) as they are officially in charge of announcing a recession. The NBER considers U.S. economic contraction in nonfarm payrolls, industrial production, retail sales and broad business weakness in pinpointing the start and end of a recession. The problem is that the classic definition was hit but the new “whatever we say it is” definition was not.
This is also taking place during what most adults under the age of 60 will feel is an unprecedented interest rate hiking cycle by the Federal Reserve. The St. Louis Fed’s FRED charts identify that there have been 8 recessions since 1970. And the rapid surge in oil prices saw oil prices go from under $70 per barrel late in 2021 to handily above $120 in the first quarter of 2022 as the Russian invasion of Ukraine kicked into full swing. Oil did briefly retreat back to under $80 in a steady summer decline (due to lower global demand) but oil was back to nearly $90 per barrel at the time of this snapshot.
This does have to matter to collectors right? Well, yes and no — or even maybe. A lot of this may depend on whether you merely collect, or if you both collect and invest, or whether you only invest in and deal in collectibles. There is also a difference among art, wine and whisky, sports, comics, autographs, coins, exotic automobiles and so on within collectibles. Just do not believe for a second that any insiders in these fields believe that a severe recession would offer absolute protection in a turbulent time.
GDP growth of 2.6% in the third quarter of 2022 was the first quarter of actual growth in 2022, following -1.6% in Q1 and -0.6% in Q2. Consumer spending and unemployment never flashed the huge recession signs that would have otherwise been there.
The war in Ukraine only piled on to what was already a surging level of inflation, which was at 6.7% CPI (consumer prices) in 2021 and the Russian invasion news wasn’t even on the radar until earlier in 2022. The problems were brewing even before the war, but this was the straw that broke the horse’s back. Just ask Europe.
QUANTITY vs. QUALITY…
So what really helped GDP recovery in the third quarter of 2022? Consumers helped, as did a narrowing U.S. trade gap. This is against a backdrop of slower consumer spending data, early signs of layoffs by major corporations, an absolute screeching halt to housing, surging interest rates, and the actual “quality” of spending.
It is even possible to argue that the GDP recovery was not really for the right reasons you would have otherwise hoped for. Consumers are facing high single-digit inflation (8.2% CPI so far in 2022) that has not been seen in 40 years. If you are not over the age of 60 or 70, you haven’t really had to navigate this before. And producer prices, which are supposed to lead consumer prices, stayed strong at 8.5% in September and may keep the fears of ongoing consumer inflation longer.
Fewer consumer goods were purchased and consumer spending makes up two-thirds to 70% of GDP in modern general terms. Healthcare spending was shown to help boost the Q3-GDP reading. Another boost to GDP was federal, state and local government spending gains. And in an odd twist, with trade impacting GDP, U.S. retailers imported fewer items and exported more goods and services (one key driver was also travel). Still, spending on travel, retail and restaurants has remained stronger than expected considering the warnings that are present.
JOBS STILL STRONG
Unemployment has remained very low with 3.5% being the last read. That said, employment always lags in economic cycles. Big businesses want to wait until it is unavoidable to begin layoffs of their employees. And on the flipside, they generally want multiple levels of confirmation that the economic recovery in underway before they begin to add employees back and then expand.
Another area of concern is the most recent labor force participation rate of just 62.3%. This was at 63.4% in the last reading before the pandemic and is down from about 66% before the 2008 global financial crisis set in.
On the backdrop of trade, a very strong U.S. dollar may act as strong headwinds going forward. This makes exporting U.S. goods and services more expensive for foreign buyers, and it makes foreign goods and services cheaper for U.S. buyers.
CORPORATE NEWS & PRODUCTION
U.S. Industrial Production was a positive boost here as the level rose 5.3% annually for the September 2022 reading. This was the highest since April 2022, but it is also at a time when corporations are almost unilaterally guiding down expectations along with their respective earnings reports on a live basis.
And speaking of earnings report summary and forecast summary from major corporations, here is a snapshot of America’s companies that were quite disappointing ahead of or on their formal earnings announcements just over the last month: FedEx, Microsoft, Alphabet, Facebook (sorry, Meta), Texas Instruments, Intel, AMD, Nvidia, Micron, and many more.
That said, the banks have a clear insight into consumer finances and they are by and large maintaining that unemployment will rise and that a light recession is likely – but they also maintain that consumers remain healthy with spending and strong personal balance sheets.
We do not yet have Q3 data on employment costs and productivity, which will be out on November 3, 2022. That said, here was the Q2 data from the Labor Department showing lags and inversions versus overall prices:
- Productivity decreased 4.1% in the nonfarm business sector in the second quarter of 2022; unit labor costs increased 10.2% (seasonally adjusted annual rates). In manufacturing, productivity increased 4.7% and unit labor costs decreased 0.2%.
- Over the year, total compensation rose 5.1%, wages and salaries rose 5.3%, and benefit costs rose 4.8%.
How long will businesses continue to pay higher wages for lower productivity and higher demands than ever from workers? That remains to be seen, but labor has so far been able to stay on top.
INTEREST RATES & FEDERAL RESERVE
Keep in mind that the rise in interest rates has been in anticipation of further rate hikes by the Federal Reserve in 2022 and perhaps even into 2023. That will not be known for another week, but the 10-year Treasury yield went from about 1.8% at the start of this year to a recent peak of 4.3% before recently coming back down to about 4.0%.
The Fed’s FOMC decided in September to raise its fed funds target to a range of 3.00% to 3.25%, but the official statement already said it “anticipates that ongoing increases in the target range will be appropriate.” The Fed’s economic projections also show the fed funds range from 4.1% to 4.4% for the end of 2022 and then going up to 4.4% to 4.9% in 2023, with the fed funds rates coming back down to a 3.4% to 4.4% range in 2024 and 2.4% to 3.4% in 2025. Those are just projections and the Fed itself would (hopefully) admit are mere snapshot views based on current data rather than crystal ball forecasts.
Another question to ask is whether or not the continued efforts of free money being handed out in droves really helps inflation. It might make the person receiving the money fell better about higher costs. And having certain debts you took on your own might make you feel better too. But adding more money into the system when prices are already surging is simply adding more gasoline to the fire.
Does any of this have a role in the world collectibles, particularly high-end collectibles? The short answer is “yes.” The longer answer is that it depends what you define as high-end, scarce, in high demand and so on. Many of the collectibles in the latter group have proven to be more than resilient.
Going on and on about economic releases can of course be as exciting as watching paint dry. That said, it’s all about a recession and recessions are generally not the most fun times for prosperity. A single quarter’s interruption of GDP contraction does eliminate the classical definition, but the real challenge is that now the financial houses and media outlets are all warning of higher recession risks heading into 2023 and into the new year. To stay consistent, every recession is different — and whether you feel the U.S. is already in recession or is still just at risk is up to you to decide.
In the end, inflation should ultimately back off but perhaps not to prior levels for some time. Unemployment should ultimately tick up, but probably not significantly. The labor force participation rate needs to recover. And at some point the dollar needs to give back some of its gains. Then again, the economies in Asia and Europe are far worse off than we are. Again, all recessions are different and they don’t all have to feel like 2020 or 2008.