Literally everyone asks, “Are we headed for a recession?”
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What follows is an AI-generated transcript. The transcript may contain errors and is not a substitute for watching the video.
Christopher Penn 0:13
In today’s episode, literally everyone asks, Are we headed for a recession is a recession imminent? So let’s take a look at some data here.
This is the eight measures that the National Bureau of Economic Research uses to calculate whether or not a recession has occurred.
Remember that, at least in the USA, the National Bureau of Economic Research declares a recession typically after it’s over, right, because they’re looking for at least two quarters of negative growth.
And they can issue a reasonably good indicator like yeah, we’re in one now, or we’re not in one now.
But the official declaration of when a recession occurred happens after the event is already over.
That said, they also do publish the technical indicators, the math indicators that they use from the Federal Reserve Bank, the Bureau of Labor, statistics, etc, that indicate that a recession is or is not in progress.
So we have access you and I, as ordinary internet citizens have access to those measures.
So let’s look at them we have industrial production, real disposable personal income, total nonfarm, private employment GDI, gross domestic income, gross domestic product manufacturing, trade surplus, personal consumption and expenditures, personal income, less receipts and transfers and total employment level.
Now I have rescaled, all of these values, because they are wildly different values on a zero to 100 scale so that we can do an apples to apples comparison, what we’re looking at, you can obviously see that there was definitely a recession in q2 of 2020.
Right, every number fell off a cliff pretty much except for disposable personal income.
And then there was still not great growth in q3.
By the time q4 rolled around in 2020.
Things were sort of back on track.
So there was a recession in 2020.
No surprise there.
But when you look at the rest of these lines, to me, none of these are in real trouble, GDP has stumbled a little bit in the last quarter.
real disposable personal income is down and it’s actually down pretty substantially.
It’s down to pre pandemic levels.
That’s not a surprise.
real disposable personal income, a lot of people got a lot of benefit from all the different COVID stimulus packages that occurred.
And so people frankly, had a lot of extra money to spend and now things are returning normal and that that number is headed basically back down to where it used to be.
The other measures GDI industrial production, total employment levels, all that stuff is still on an upward trend.
And that upward trend says no, there is not a recession imminent now.
Is there a recession in the future? Yes, of course, there’s always going to be a recession, there’s always going to be a period of growth, right? The economy kind of goes and fits and starts in these cycles.
Is the recession going to happen in the next 30 days? Probably not.
Right? Probably not.
So what is going to happen? Why is there so much economic angst? A big part of what’s happening is you have sort of runaway inflation, planet wide, this is not limited to the United States.
This is not something that one particular politician did.
This is a planetary problem right now.
And it’s being driven by a few different things.
One, the Russian invasion of Ukraine, right, that has caused massive supply chain disruptions and all sorts of chaos.
That probably won’t stop until Russia gets its butt handed to it and exits Ukraine.
They have been dramatic, and it’s very serious climate impacts this year.
India, for example, earlier in this year had a massive, very, very intense Heatwave, that apparently wiped out about 20% of their wheat.
It’s just gone combined that with Ukraine losing like 40% of its harvest, and you have some very, very serious food supply issues.
You have obviously the energy costs from as a consequence of the Russian invasion, and you have many more buyers of energy that are willing to pay higher prices like most of Western Europe, which was dependent on Russian oil and gas, they are now transitioning.
Little uncomfortably to different sources.
And part of that process is creating much higher demand for natural gas and gasoline and other petroleum products.
So you’ve got all these economic pressures that are creating inflation, very, very high inflation, which
Christopher Penn 5:08
just means everything costs more, right? If your product has to be delivered in gases, you know, 5 a gallon or2, a liter, or whatever it is, wherever you are, those higher costs get passed on, right.
So everything gets more expensive and wages do not necessarily keep track.
That’s the issue.
Once inflation is decoupled from wages, if prices go up, but your pay goes up, 10%, you know, at the same rate, then you’re basically holding steady, if prices go up, 20%, and your wages only go up 10%, you’re losing ground.
As a result, inflation can and will eventually lead to a recession.
Because as prices go up, people buy less just simply economics, people buy less stuff when they have less money when the money doesn’t go as far.
And taming inflation is the one of the remits of most of the world’s central banks, right now, they’re trying really hard by doing things like raising interest rates, raising interest rates, makes money cost more.
And the organizations that this hits the hardest are banks, typically, banks then have to charge more for the interest they charge customers, which makes things like lending more expensive, which in turn makes purchases of houses and cars less frequent, because it costs more, but the cost of money goes up.
So what remains to be seen is how bad inflation will get this year? And the answer is nobody knows.
Because this so far has been a year of dramatic shocks to the overall economic system of the planet.
And a lot of industries that are not agile enough and not resilient enough to deal with those shocks when they happen.
So is the recession in it very soon? Probably not.
Most of these indicators are still stable.
Could we see one, you know, before the end of the year, maybe? Maybe? It depends again, on what’s happening with prices, really.
In the United States, at least, there’s going to be some elections at the end of this year that has the potential to cause more chaos, particularly if some of the political groups in the US decided to I don’t know, go storm the US government again.
So all these things are system shocks that can occur.
That throw an enormous amount of uncertainty in the mix.
Nobody likes uncertainty.
Nobody likes uncertainty, because it’s very hard to figure out what to do next.
So I think a recession maybe in 2023 is certainly is a possibility.
2024 also possibility.
And so the advice though, for handling that is pretty much the same as the advice in general, which is make sure that you have the ability to be both agile and resilient, resilient means you can take a punch and not stay down.
Agile means you you don’t take the punch in the first place.
When that comes to finance, that means having a war chest having some cash saved up.
Because cash is king always.
And that will allow you to withstand short term shocks while having the agility to save money and invest will get additional lines of income new lines of income to replace lost ones as quickly as possible.
This is true for businesses, this is true for individuals, if you’ve got a side hustle, that’s not a bad thing to have, you know, even if it’s just making the beer money.
Having some kind of side hustle is a great way to prepare and practice for if that has to become your main hustle.
So give that some thought.
As you as you start thinking about recession data, the worst thing you can do is look at recession level data, economic data, conclude that we’re headed for a recession and then just sit there discouraged go, Well, this sucks.
And you don’t do anything.
Don’t take any action, take some kind of action, any kind of action to add income and reduce expenses.
That’s going to be your best bet in good times and bad, really important question that everybody wants the answer to? Yes, what’s coming? We don’t know when, but it’s probably if if it does, it’s going to be end of this year of 2022.
More likely 2023 as as more of the system shocks work their way through.
Talk to you soon.
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