How you define a recession may vary wildly from how others define a recession. There is an old joke, if it’s ok to joke about future suffering — “A recession is when your neighbors lose their job, a depression is when you lose your job.” Some of us feel that the United States is already in a recession. Others are still debating whether a recession will come.
The National Bureau of Economic Research is the body which officially declares when the U.S. economy has entered into a recession. The classic definition of two consecutive quarters of a decline in real Gross Domestic Product (GDP) is no longer used. Now the definition of a recession is a significant decline in economic activity spread across the economy and lasting more than a few months — generally seen in real GDP, real income, employment, industrial production, and wholesale-retail sales. Frankly, by the time they admit it’s a recession it’s already too late.
Collectors Dashboard does track the real economy the same way we view high-end collectibles as an alternative asset class. The same capital in high-end collectibles could have just as easily (actually, more easily) been invested into stocks, bonds and traditional investment vehicles. That means that a recession has to have an impact on collectibles. Or does it?
The reality is that high-end collectibles are still fetching high prices in sales and in auctions. Some record prices are continuing to be seen. And some expectations from sellers are coming with lower-than-expected prices. And many dealers and other sellers simply will not sell their assets for what the prevailing “bid” may happen to be. It happens.
At this time the second quarter of 2022 is rolling into the third quarter (in less than 36 hours!). There are more and more calls for a recession that are being communicated as “risks of a recession.” Just keep in mind that all recessions are different. The recession we are arguably in already (or will likely enter into shortly) will likely be quite different from the COVID-19 recession and will be quite different than the global financial crisis. And it will likely be different in a “better” way.
More outside views are lining up for the risk of recession. These are some of the freshest outside views that have been made public or which have been published.
Q1-GDP WAS WORSE THAN PREVIOUSLY THOUGHT
One building issue is that the first quarter’s U.S. GDP numbers were actually a bit worse than they were first shown to be. Consumer spending was up just 1.8% in the first quarter versus the prior estimate of 3.1% growth. That is not without consequence since two-thirds or more of GDP is from consumer spending. That took the Q1-GDP reading to -1.6% from the prior -1.5% level.
As for right now, Federal Reserve Chairman Jerome Powell and his fellow Fed presidents have been adamant that the Fed will try to avoid a recession as it combats inflation with a long string of interest rate hikes. That tone has changed and more recently they have admitted that a soft-landing will be difficult.
The short-term Fed Funds rate has been raised to a target range of 1.50% to 1.75% up from what was a nearly perpetual zero-rate for so long. And the Fed is expected to raise rates again in July and even further in 2022.
The long and short, just spoken by Mr. Powell at a European Central Bank forum, was this — the Fed still sees a path back to its 2% inflation target while keeping a strong labor market, but his message came with a “no guarantee that we can do that” warning.
IHS Markit releases economic data of its own and it makes forecasts on its own. The new IHS Markit forecast for Q2-GDP is now for growth to be down to just 0.1%. IHS Markit had previously been calling for 1% growth in Q2-GDP.
THE FEDERAL RESERVE BANK OF ATLANTA
The Federal Reserve Bank of Atlanta issues updates to its GDPNow and it is now (as of June 27, 2022) signaling that the seasonally adjusted real GDP growth is just 0.3%. That is at least better than the 0.0% forecast from a week earlier but the revision is because the “nowcast” of real gross private domestic investment growth increased to -8.1% from -9.0% (hardly any real “good news” to speak of).
J.P. MORGAN CHASE RISKS
J.P. Morgan Chase has sounded a louder alert about the risk of recession. Their view is now that it is reasonable to consider that the U.S and/or the global economy may slip into economic recession this year. The rising concerns about inflation shocks and a more aggressive Federal Reserve (rates and balance sheet trimming) are coming at the same time that sentiment in sliding lower.
This is a serious turn considering that it was just a week earlier that JPMorgan’s global markets outlook had indicated that its economists did not see a recession materializing this year.
S&P SEES RISING RISKS
And now Standard & Poor’s has also issued its paper “The Rising Risk Of Recession in the U.S.” with the following note — The likelihood that activity in the world’s largest economy will sharply contract at some point in the next year is expanding. S&P’s views call out worsening supply chain disruptions, mounting inflation, depressed purchasing power, consumer confidence, and aggressive Fed monetary policy tightening pressuring the U.S.’s economic momentum this year and next.
S&P now sees the risks of a technical recession (at least two consecutive quarters of contraction) has grown to 40% (within a 35%-45% range) in the next 12 months. The base case is calling for U.S. GDP to slow to 2.4% this year. Their view for 2023 “may bring a low-growth recession with a GDP gain of just 1.6% and a higher unemployment rate of 4.3%”… As growth weakens and costs of living soar, the prospects of a soft-landing for the U.S. economy are dimming… The hot housing market is likely to cool against this backdrop as interest rates and prices continue to rise. The formal statement:
“As we inch toward potential recession, we expect the Fed’s stronger action to slow hiring and raise unemployment. Under such a scenario, the ‘cure’ for the U.S. economy and jobs market may feel worse than the disease. We expect that the Fed raising interest rates and reducing its balance sheet will be enough to eventually begin to tame inflation and help restore real wage strength and purchasing power. The question is whether it will push the U.S. into recession as well.”
As a reminder, any and all outside views can change on a moment’s notice. High-end collectibles are supposed to be at least somewhat insulated from recessions as investors look for assets where returns are not being correlated to the S&P 500 and traditional investments. The (still likely) recession of 2022 looks to be “less bad” than prior recessions, at least as of today, but there are risks and opportunities alike that need to be considered.