Jess: Right now, the word that keeps rolling around the stock market is recession. Well, the Fed's actions, they normally ended a recession. That is a portion of the business cycle. And there's this question that everyone's asking. Every economist, every person on the street, everyone talking in the media is asking is that the Fed is super restrictive. They're in what we're calling a restrictive environment right now. And the big question is, are we going to have a soft landing? Are we going to have no landing? And all of that refers to a recession. And the reason why we're talking about the business cycle is so we can identify and understand if we're a recession, which is what those landings mean. Okay.
Jessie: That sounded like some jargon. I think you went to jargon land a little bit. So I have not heard of a soft landing or hard landing or no landing before. Do you want to break that down a little bit?
Jess: Yes. So when we talked about one of our stock market updates about our restrictive Fed, that means they are rising interest rates. Right. And they're basically trying to slow down consumer spending or slow down growth, slow down the economy. And when they do that, normally, you don't spend as much. And if you don't spend as much, companies don't make as much. But if you're stopping spending so much and sometimes it drains people's savings, which is such a terrible concept, even if you think about that. Yeah, the landing part like think about almost like a plane. You're when you're in a plane, you can tell we were definitely on vacation. So if you're going to make sure you're like ascending right into the skies, the Fed's the pilot. So you raise interest rates at a record high pace, which means the plane was accelerating at a record high pace, and that could be detrimental if you go too high. The cruising altitude is where he keeps interest rates. The landing scenario means. Is that going to tip us into a recession? So we need to define what a recession is, and that's what we're going to do today. And that will help explain what the landing means. But soft landing means like barely a recession. Hard landing means super recession. No landing means we did not end up in a recession.
Jessie: It feels like it's a little bit unique right now because they're trying to slow down consumer spending. It doesn't seem like that's happening, like people are still spending. Like we talked about how Pepsi raised their prices and nobody stopped buying it. So it doesn't seem like no matter how high they're raising these interest rates. I mean, maybe it's more about like the big spending, like mortgages and things versus like the everyday purchases that people are still doing.
Jess: It's all of that, actually. So we call that a deflationary environment is when the prices are coming down and you have to look at a lot of data to determine if that's happening. When you have a restrictive Fed, that interest rate policy, you bring up a really good point. It has what we call lag effects, like an average of six months. When the Fed raises interest rates that the consumer starts feeling it, you're going to have a higher interest rate. So you may not be buying that house or you might be taking on more credit card debt, but those payments haven't kicked in or you haven't reached that high limit yet. And it takes some time for it to go through the system. And the Fed is at the end of determining that acceleration and they're trying to find their cruising altitude, and I think they're at their cruising altitude. That's my personal opinion. So now what we need to do because the market's forward looking, is understand the business cycle and think about the landing scenario.
Jessie: Okay. So then what exactly is the business cycle?
Jess: So hard to describe this one without some jargon, and I'm so excited for the analogy. It's today. It's my favorite of all time I think we've ever done. It's periods of economic expansion and contraction. It's based on depth, fusion, duration, a lot of economic indicators. Those periods of expansion, they they start and they end with what's called turning points. And there's this bureau called the National Bureau of Economic Research that decide what those turning points are and those become peaks and troughs. So like top of the mountain, bottom of the mountain. And economic expansion is literally mean. Things are growing quite a bit and that's good. Contraction is slowing down growth. This is slowing down growth also good, though, and things are like getting out of hand.
Jessie: Like that's kind of what the Fed is trying to do right now, right?
Jess: Absolutely. That's the Fed's job. You don't want too much growth too fast because then that leads to high inflation. Right. And so the peak of the business cycle. Exactly. And that's normally when the Fed steps in and they say, hey, growing too fast, prices are going to get too high.
Jessie: So do we have an analogy for the business cycle?
Jess: The business cycle is complex because there's different data points that we take into consideration to understand if the economy's growing or it's slowing down. I know we started with a lot of jargon and we're going to break that down. And I promise you, by the end of this episode, you're going to understand the business cycle inside and out. The best analogy is a menstrual cycle. It's way more than just a period, very sophisticated, complex as can be. It is a lot of activities with our brains, ovaries, uterus.
Jessie: Yes, it makes sense too, because there's four phases of the business cycle. Right. And technically more phases of the menstrual cycle.
Jess: Your hormone levels increase, you get more energy you're striving for in those creative modes. That's the turning point in your cycle that has to do with pre and post ovulation. And those turning points would be the bottom of economic growth or the top of economic growth. But there's also not a typical business cycle. It changes over time and so do menstrual cycles.
Jessie: Yeah. So how are you going to break this down? So we start with the economy.
Jess: Yeah. So we have talked heavily about the consumer. Then there are the producers. So the people who are actually producing products that's the economy together is this constant exchange between producers and consumers. The economy is not stock market, meaning if the economy's doing well, so is the stock market. Generally,
Jessie: The stock market is completely separate from the economy and how the economy is acting, performing, right?
Jess: The stock market represents a bunch of companies. And if the companies are doing well, then the stock market goes up. The. The companies collectively doing well.
Jessie: not the economy as a whole, because there are other things happening in the economy, too. Correct?
Jess: Yeah. The economy is made up of consumers, too, and producers. So it's not just businesses. You can't say, oh, all the businesses in America are doing well. It I mean, it should mean that the overall economy is doing well. It's highly correlated because if businesses are doing well, then consumers are able to spend money.
Jessie: Right. Okay. So if the economy is not doing well, then we are in a contractionary phase of the cycle. Or what does that mean?
Jess: This is where I want to debunk another super common misconception you will hear very often in finance media. They call it a technical recession, where there have been two consecutive quarters in decline of real GDP, which means we're in a recession or a contraction. So when we say we're in a contractionary phase of the cycle, that actually means we're in a recession. The turning point means growth has stopped. It's slowing down. There's not as many earnings. Therefore, we entered a recessionary period. The technical definition is two consecutive quarters of decline in real GDP. That is not a recession.
Jessie: What is GDP?
Jess: GROSS domestic product. So you take the entire market value of all of the goods and services. GDP is a gross domestic product. So the word gross. You know, like you say, it's my gross salary. Like you net out other things you are actually taking into account like imports and exports. So it's a like literally what we're producing as a country inclusive of what we're bringing in, in addition to what we're bringing out.
Jessie: Oh, okay.
Jess: Rising means the economy's good, right? Like producing more goods and services. Oh, that's great. And just because we're declining, because we're not producing as much does not mean that we're in a recession. Literally, just like your cycle. If you have your period, generally it means you're not pregnant. But it doesn't always. highly correlated.
Jessie: It's true I've known a few people to be pregnant on their periods.
Jess: Exactly. Highly correlated, though. So that's why people tend to turn to others to negative quarters of GDP must be in a recession.
Jessie: Have we been in decline the last two quarters?
Jess: We have had two declines of GDP. Yes, but a recession has not been declared. There is such a good case in point. In the dot com bubble, which is around 2001, that was a recession. There were no declines in GDP.
Jessie: Okay. So we talked about what is GDP. We know it's gross domestic product. A common misconception is that we're in a recession when there's two consecutive quarters of decline in GDP. But that's not necessarily true. And right now, as of September 2023, we're saying that we do have a decline in GDP.
Jess: We have had that, but there has not been a recession called.
Jessie: When was our last recession like? Was there technically a recession during COVID?
Jess: There was.
Jessie: Who is deciding all of this? Like, what are they looking at?
Jess: This is the NBER National Bureau of Economic Research. The Finance World really loves their acronyms. Yes, they're nonprofit, super bipartisan group of economists. They called the turning points in their definition of those turning points of economic activity. They include this phrase, a significant decline in economic activity. They do look at GDP that's quarterly and they look at other data that comes out monthly,
Jessie: Two consecutive quarters of decline of GDP. That's just like one indicator in a bunch of things. They're kind of going to study it before they would call a recession.
Jess: Absolutely. And you have to look at so many more details. So you look at employment, is everyone employed? What is income? What is production like? And consumption all goes together. So do you have a job? How much money do you make at that job? Is there lots of production within the services sector or the goods sector and what is consumption of what's being produced?
Jessie: How is the NBER looking at all of the things? And
Jess: I like to say that they're looking at it in three D first is depth. How bad is it? So if there is this slight decline in growth or if it's not that bad, why would it be a recession? Right. Right. Diffusion, how widespread is it? So if there's a disease that happened or maybe we can even think about. COVID and some of the past recessions and why it was called it was a global, global issue. Therefore, from a three dimensional view, it was deep enough and widespread enough, even though it wasn't that long to be considered a recession. Because of the big impact. So they look at depth, which is literally how bad it is diffusion. How widespread is it and duration? How long is it? Even if think about this as a disease because your body is the economy and maybe that's like cysts on your ovaries. Not a medical person. So in the comments please feel free to correct, but I believe we look at how bad that is. Then you go get that checked out. They'd say, All right, this, oh, this isn't too big or nothing to worry about. You might see how widespread it is. Do you have a lot of these? And they'll also look at duration like how long has that been there? Is it growing really quickly? They'll say, you know what, this is something that you don't have to worry about it. Your body can still grow. You're going to be okay. We're going to watch it. Or I am. I say you're about to go next to a contractionary phase can do some healing. You know,
Jessie: that makes sense. Got it, depth diffusion duration. Okay.
Jess: Exactly. Now this is the important part. Normally when they say, hey, we're in a recession, we're already out of it. At that point when they call a recession, that's why people go back to that two consecutive quarters of GDP because they're like, Well, how long we gonna wait on these guys?
Jessie: Okay, wait. So there's many factors that go into calling a recession, and there's a lot of speculation that we're already in one. That speculation is there because we know that recessions are called in retrospect, you might not call a recession for another quarter, but we could have already been in it.
Jess: Oh, it's even longer than that. The average lags of the announcement of the recession start and the end dates. So turning points is what we're looking for is eight months for the peaks and 15 months for the troughs.
Jessie: Now, what about a depression? A depression worse than a recession? Obviously, I'm thinking about the Great Depression. Like, what's the difference between a depression and a recession?
Jess: It is a term coined by recessionary periods, so like it's literally just means recession. And it was just really the Great Depression, which is in like 1929. There is no calling of depressions. There is nothing that says this long of a period equals a depression, like literally the depression. Is that one time frame that your mind exactly went to. So we're going to go to the Fred, which is the St Louis Fed Economic Data Dashboard. And the NBER has like this turning point dashboard that you can access.
Jessie: Yeah, Fred account dot St Louis Fed dot org. And we're looking at the data considered for the NBER turning point.
Jess: The first one, all employees total non-farm payroll like literally in the name
Jessie: not farmers.
Jess: Yeah, exactly. It excludes farm workers. It's the total number of paid U.S. workers, private household employees, nonprofit organization employees. Just gives you the overall health of the job market. That's how many people are on payroll.
Jessie: We're seeing like obviously a huge job during the pandemic, but then we saw like a pretty fast spike now that we're above pre-pandemic levels. Is that me? Like that's showing that the growth is happening to faster.
Jess: This is where the resilient consumer is coming from. If you're employed, you're spending money and we have employment levels now that are better than pre-COVID.
Jessie: Okay.
Jess: We just talked about non-farm payroll. That's just one piece. Then they'll look at the employment levels. So that's broader. That's why the numbers are different. Those are the people employed in so many sectors, different age groups
Jessie: I'm seeing like industrial production, real manufacturing and trade, industry sales, and they're all kind of showing that same kind of like drop and then spike. Well, in different levels. Some are like spiking up faster than others. We get to like real personal income excluding current transfer receipts. That one didn't seem to sink as low during the pandemic,
Jess: which is super interesting when you say personal income. So that's looking at the income side. Transfer receipts or transfer payments means like government payments. So when you exclude transfer receipts, government aid like Social Security and things like that, it's income that people are earning on their own independent of the government and the word real. What makes it real anytime you see that word in economic data means that it's adjusted for inflation.
Jessie: Oh, it's a real personal consumption expenditures
Jess: that one is the value of goods and services that was consumed by households. So it's actually a piece of GDP and it tells you how much consumer demand there is.
Jessie: It's like travel down. But toilet paper sales went up and like crazy things, people were buying the stock up on it.
Jess: It makes perfect sense, right? Because there might have been a bunch of layoffs, but then there was really quick hiring. And income didn't go down in tandem with the employment rate, which is interesting. And there was a huge transfer of goods because people were like all into skin care and people were bored and things went on sale and so they bought stuff
Jessie: that does make sense. Okay. So then we have a real average of GDP and GDI.
Jess: So gross domestic product is the market value of everything. GROSS domestic income is like literally the money or the profit piece.
Jessie: These are all the factors that the NBER looking at to consider if there's like turning points in the economy.
Jess: Exactly. That's it. You don't have to look at these every single day. And that's definitely not the point of this episode. When you hear the word recession. No, that we're not in one. It has it been called. We could be in one. This is what's so important about it is normally the Fed pushes or constrains the consumer so much they push the economy into a recession. Hopefully this makes everything make sense. Going through the data that you'd see on this page, you're in a recession. If people are unemployed, employed companies are producing as much, they don't need as much labor. Therefore, employment goes down, unemployment goes up. That means real manufacturing and trade industry and all those sales are going down. So they don't need employees. And when they don't need employees, then personal income goes down. And if that goes down, we're not spending, we're not consuming as much that will go down. And then all of that has a major role in the gross domestic product, which we produce as a country.
Jessie: It's interesting.
Jess: It's an important part in the stock market, I know is in the stock market update and give you a little brief one. The Fed seems to be done with their hiking cycle, but it's up in the air if they're going to do one more. I personally don't think they should because restrictive policy acts with a lag, and I don't think that's fully gone through the system.
Jessie: We're really hoping to see prices come down. I mean, the consumers are like are going out here paying these grocery bills and things. You know, travel has come down at least. So that's one thing. It's expensive out here.
Jess: There is some good news. Wage inflation is outpacing the CPI change. Now CPI is slowing down. We still look at the change and you want the change to be 2% year over year. That is the goal. And if you have wage income slightly higher than inflation, then that's good for the economy. It's all about this like equilibrium and balance slow, sustainable growth.
Jessie: Okay. Well, I'm glad we learned about the business cycle today because it sounds like something we should all know and be paying attention to in terms of how maybe we're spending money, how much you're investing, or how much credit we're trying to get. It's good to know about these different potential turning points that definitely affects the consumer. This is good to know we have the tools now. We know how to go, seek the information out for ourselves instead of listening to what people on TikTok or whatever are speculating. But we can at least go and do our own investigating now.
Jess: Yes, Jess super helpful,
Jess: always validating. And thanks for teaching me about my period. Just like knowing about the business cycle. This makes you a more informed investor knowing about your menstrual cycle. Inform you...
Jessie: help prepare your body for what's coming and know interest or when to do more,
Jess: or which is what you should do with your portfolio and business cycle. It's just like your menstrual cycle complex but informative.
Jessie: yes. That wraps up today's episode on the business cycle and knowing if we're in a recession or not.
Jess: If you learned something today, please leave a comment. Share it with your friends. Helps the algorithm. We love your feedback. It fuels our mission. Let us know your thoughts.
Jessie: Give us a five star review if you found it helpful. Always check out the episode Equity on MarketMakeHerPodcast.com that's market makeher H-E-R podcast dot com. There's lots of free valuable information and resources there that we're always updating on the website, so check that out.
Jess: Remember, when you build knowledge, you break barriers.
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