Ep 13: Are We in a Recession?

Confused by "soft landings" or the big 'R' (recession!)? Are you trying to figure out if we are in a recession or what that really means? The answers can be uncovered by understanding the business cycle. Just as menstrual cycles are complex and changing as we grow... the business cycle certainly shares parallels. Join the conversation as we decode the jargon, and more importantly show you the tools and resources you need to become a more informed investor.

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What is a recession?

A recession is a period of significant decline in economic activity. It is essentially a contractionary phase of the business cycle meaning the economy has “turned” towards slowing growth. Slowing growth can mean a variety of things spanning across: employment, income, production and consumption. Generally, in recessionary periods, production slows (companies are not producing as many goods and services), employment levels then decline (not as many workers are needed), income declines (due to the lack of wages), and then consumption declines (lack of income means less spending), all of which are signs of recessionary periods.

A recession is a component of the Business Cycle

The business cycle is comprised of periods of economic expansion and contraction based on the depth, diffusion, and duration of a broad range of economic indicators. The periods of expansion and contraction begin and end with what is called “turning points” as defined by the NBER (National Bureau of Economic Research). The turning points become peaks and troughs. Peaks are called when the economy is slowing down. Troughs are called when it picks back up.

The business cycle: expansion -> peak -> contraction -> trough and repeat.

It’s complex, sophisticated and as relatable as a menstrual cycle!

The menstrual cycle is much more than just a “period” it’s much more sophisticated. It’s a broad range of activities between our brains, ovaries and uterus all linked to hormones. Basically, menstrual cycles have two phases: before ovulation and after ovulation, our hormones change and subsequently our energy levels. The business cycle is soooooo similar – expansion means periods of economic growth. Think of this like your hormone levels increasing, getting more energy, you’re thriving. The “turning point” in the menstrual cycle is after ovulation (and you’re not pregnant) when your hormone levels start plummeting and you lose your energy – this is like the contraction phase in the business cycle (also called a recession).  

Relating it to current stock market events

The Fed’s actions normally end in a recession… which is a period in the business cycle. The 'Are We in a Recession' question will help us understand if we will have a “soft landing” or a “hard landing” or “no landing”. That all depends on if we end up in a period of economic contraction AKA a recession.

So really, we are understanding what periods of economic contraction and expansion means. When the begin and end and who determines all of that so you can know what to look for in terms of “landing”.

"The Fed's the pilot. So you raise interest rates at a record high pace... The cruising altitude is where he keeps interest rates. The landing scenario means: is that going to tip us into a recession?"

The stock market is not the economy

The economy is mainly made up of producers and consumers. People and entities produce products and people and entities consume products. The economy is not the stock market – meaning the stock market is not a gauge of the economy at all. But rather economic health impacts the stock market. Generally, if the economy is doing well so is the stock market. Just like your period impacts you, you are not your period. You as a person represents the economy in this analogy.  

Gross Domestic Product (GDP) and recession calls

GDP stands for gross domestic product. It’s basically the market value of all goods and services for a specific country. Sounds like CPI, it's not… because it takes into account imports and exports and is more complex than simply the price of goods and services. Rising GDP means we are buying more within our borders. Yeah, that means the economy is good. Often times, two consecutive quarters of GDP decline is called a 'technical recession". This is not necessarily true. Just because it is declining doesn’t necessarily mean we are in a recession. Case and point: we had two consecutive quarters of GDP declines since Covid and a recession has not been called yet (doesn’t mean that it will not be though). Additionally, in 2001 (dot com bubble and period and recessionary period) did not include 2 consecutive quarters of GDP declining. It’s just a highly correlated figure. Just because you had your period doesn’t mean that you are not pregnant – but it’s highly correlated.

How recessionary periods are determined

The almighty NBER which stands for National Bureau of Economic Research. They are a non-profit, super bi-partisan group of economists that call the ‘turning points” in economic activity. The NBER definition includes the phrase, “a significant decline in economic activity."

They do look at GDP, (which is quarterly), they also look at a lot of other economic data related to employment, income, production and consumption. Just like our periods vary and change as we grow and age so does the business cycle’s contributing factors to what determines a recession. They have said that over the most recent decade there has been more weight on real personal income less transfers and non-farm payroll employment…

The NBER looks at this data in 3-D:  

  • Depth – How bad?
  • Diffusion – how widespread?
  • Duration - how long?

They also look at it in retrospect. Meaning normally when they let us know we were in a recession we are already out of it and usually like really far out of it. They have a really great dashboard of all of the date they use to determine these turning points that you are welcome to explore. It’s tool time! https://fredaccount.stlouisfed.org/public/dashboard/84408

Jessie's Questions

  • Q: Why is it so important to talk about the business cycle right now?
  • A: With the stock market's focus on a potential recession and the Federal Reserve's actions that might end this recession, understanding the business cycle is crucial.
  • Q: Can you explain "soft landing," "hard landing," and "no landing"?
  • A: When the Federal Reserve raises interest rates to slow down the economy, a "soft landing" means a minor recession, a "hard landing" indicates a significant recession, and "no landing" means avoiding a recession altogether.
  • Q: Why are people still spending even when the Fed is trying to slow down consumer spending?
  • A: There's a delay between the Fed raising interest rates and consumers feeling its effects. They might face higher rates later or accumulate more debt.
  • Q: What is the business cycle?
  • A: The business cycle is periods of economic expansion (growth) and contraction (slowdown or recession). The National Bureau of Economic Research determines its turning points.
  • Q: How does the economy differ from the stock market?
  • A: The economy comprises both consumers and producers, while the stock market represents companies. The stock market's performance doesn't always directly reflect the entire economy's state.
  • Q: What does being in a contractionary phase mean for the economy?
  • A: Being in a contractionary phase typically means the economy is in a recession, signified by slowing growth and possibly declining earnings.
  • Q: What is GDP, and how does it relate to a recession?
  • A: GDP, or Gross Domestic Product, is the total value of goods and services a country produces. While two consecutive quarters of declining GDP is often seen as a sign of a recession, it isn't a guaranteed indicator.
  • Q: Who and what defines a recession?
  • A: The NBER (National Bureau of Economic Research) defines it based on various indicators, not just GDP decline. The NBER, using data like GDP, employment, production, and consumption.
  • Q: What criteria does the NBER use?
  • A: They consider depth (severity), diffusion (spread), and duration (length) of economic downturns.
  • Q: How does a depression differ from a recession?
  • A: A depression refers mainly to the Great Depression era. There's no set definition like for recessions.

Plug in and learn.

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Episode Transcript

Jess: You're listening to Market MakeHer the Self-Directed Stock Market Education Podcast that breaks down complex stock market topics in an easy to understand manner from her perspective.

Jessie: We're your host. I'm Jesse DeNuit, a beginner now intermediate level investor here to ask all the questions about how to do that thing rich people do and make our money and make money.

Jess: Yes. Jessie, you graduated! The new school season actually started!

Jessie: Okay. Works perfectly. Yes.

Jess: And I'm Jesse Inskip, what we're calling the resident finance expert. Been in the industry for about 15 years. And I'm here to answer all those questions and more.

Jessie: And you may have noticed we took a few weeks off from recording, hoping to give many of you time to catch up on the first 12 episodes and even listen to some of the ones that you might have needed a little bit more time to digest. I know I like to re listen to the episodes because I'm learning too. And we have given you a lot of information so far. But now we're going to start getting a little bit more in-depth on our investing journey so we can understand how it all works.

Jess: Yes, let's put the puzzle together. And the goal of today's episode is understanding how the business cycle works and how it relates to the stock market. And very specifically, that word recession.

Jessie: Yes, seems like it might be a little timely. So why is it so important to talk about the business cycle right now?