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Nuances of a Recession, Part 1 of 2

| June 29, 2022

June signals warmer days, summer vacations, or maybe relaxing at camp. The end of June wraps up the second quarter for domestic businesses and provides a measuring point for business performance through the first half of the year. So, what’s at stake? If the economy slows and dips into negative growth numbers, we will officially hit a recession, and that’s a big deal – or is it? This lingering question is the topic of this week’s post as part one in a two-part blog series.

For starters, we need to define the term recession. Textbooks define a recession as two consecutive quarters of negative gross domestic product (GDP) growth. Recessions tend to be characterized by economic and employment conditions more than anything else. From a historical perspective, economic conditions will show higher levels of inflation with rising interest rates and unemployment figures begin to show increases. Depending on where you look, these conditions are already present as news headlines pop up on a daily basis of challenges to many Americans.

The first three months showed the US economy slowing down, listing negative GDP growth for the first time since the early COVID-19 lockdown days. Officially, the first quarter of 2022 posted a negative growth number of -1.6%. Bear in mind that this number came in at the same time when the word inflation was buzzing around headlines and stock market volatility was increasing with regularity. The US can also credit part of the negative growth to decreases in defense spending and a trade deficit; and without those impacts, GDP would have been much closer to neutral.

As the second quarter began in April, many of us likely experienced a shift in how we spent our funds. Costs at the pump continued to rise while each bag of groceries packed a bigger punch. All told, personal finances may have shifted from discretionary spending to purchasing mandatory items as we saw increases in cost through inflation. Overall, spending did not slow down – the way that we spent our cash changed.  Have we collectively spent enough in the past three months to avoid a negative number in the GDP tests? We will find out on a preliminary basis in late July as those numbers are collected and released.

What does this all mean for the stock market and how can we utilize current conditions to prosper?  Read our next blog post for additional commentary on what the implications are for you as an investor and our navigational strategies we use at Katahdin.




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