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It’s Not a Recession Until This Group of Economists Says It


So has the United States just entered a recession? It depends who you ask.

As you’ve no doubt heard, real gross domestic product (GDP) in the United States fell for the second straight quarter, falling 0.2% in the June period after falling 0.4% three months earlier.

For many people, this is a clear indicator that the country is in a recession.

But according to the committee responsible for the official call on what constitutes a recession, it’s more complicated than that.

This committee is the Business Cycle Dating Committee, which is part of the National Bureau of Economic Research (NBER) in the United States. In November 2001, the eight-member group of economists sought to clarify its definition of a recession. Interestingly, members said they gave “relatively little weight to real GDP because it is only measured quarterly and is subject to significant and continuous revisions.”

So if not GDP, what is do they are looking?

Employment and wages up, but business conditions contracted in July

In the eyes of the committee, a recession is “a significant drop in activity distributed throughout the economy”. This decline, he adds, is “visible in industrial production, employment, real income and wholesale and retail trade”.

Some of the areas mentioned above are strong right now, while others are clearly slowing down.

On the positive side, the US labor market remains robust and wages and salaries continue to grow. In the second quarter, the Employment Cost Index (ECI), which measures the total compensation of private workers in all industries and occupations, rose 5.5% compared to the same quarter last year. Although the increase is not enough to keep up with inflation, it is nonetheless a healthy jump.

It’s Not a Recession Until This Group of Economists Says It

On the other hand, commercial activity seems to be slowing down. Preliminary reading of the broader US business market shows that conditions deteriorated in July. The Flash US PMI Composite Output Index, which combines services and manufacturing, came in at 47.5, the first contraction since June 2020. The only part of the economy that signaled modest expansion in July was the manufacturing, which registered a 52.2, practically in line with expectations.

It’s Not a Recession Until This Group of Economists Says It

Hope for the best, prepare for the worst

Once again, has the US economy entered a recession? The best answer to this question is: Maybe. There are mixed signals. Inflation-adjusted GDP has indeed fallen for two consecutive quarters, but that alone does not mean a decline has begun, economists say.

In fact, it is possible, though rare, for the economy to experience two or more quarters of negative growth and still not be officially in a recession. From what I can tell, the last time this happened was in 1947.

Similarly, the US economy can slide into recession without recording a decline in GDP for two quarters. It happened in 2001, during the Internet bubble.

As you may know, there is a lot of controversy and disagreement right now around the exact characteristics of a recession, just as there has been in the past. A member of the Reagan administration, for example, tried to pressure the head of the NBER to turn the 1981-82 recession into the 1980 recession, which happened before President Ronald took office. Reagan, so that it can be attributed to his predecessor.

Today, many people want to be able to blame the Biden administration for an economic downturn. They may have that chance.

For now, I believe the most important thing each of us can do as an investor is to hope for the best and prepare for the worst. This applies regardless of your position on this issue.

Building our resilience in a world of rising interest rates

Consider what McKinsey & Company said last week. The consultancy stressed that now is the time “where companies can make the kind of pivot that strengthens their growth trajectory for the next few years.” According to McKinsey, the companies best positioned to weather a potential downturn and prosper afterwards have “strong balance sheets, low leverage and ample liquidity.”

It is largely for this reason that US Global Investors has increased its cash levels. In a recession, and with rising interest rates, we want to have enough dry powder to not only survive, but also make acquisitions if the opportunity arises.

Farewell to a very special friend

On a final note, I want to share some sad news. Last week, Lundin Gold announced with regret that its founder and former chairman, Lukas Lundin, died at the age of 64, after a two-year battle with brain cancer.

Born in Stockholm, Sweden, Lukas founded Lundin Gold in 2014 and served as chairman of the board until his resignation earlier this year. Prior to that, he worked for years with his father Adolf Lundin and brother Ian Lundin in a number of resource mining companies collectively known as the Lundin Group, which cover a wide range of materials from gold to copper to petroleum. Besides Lundin Gold, these companies include Lundin Mining, NGEx Minerals, Lucara Diamond, International Petroleum and many more.

I had the pleasure of getting to know Lukas well. He was an incredible father to his four sons Harry, Adam, Jack and William, all of whom are involved in the family business, and he was as creative a force as can be in the mining community. He always had a big smile and a positive, willing attitude. A special friend, he was caring, kind and generous with others. May he rest in peace.

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Originally published August 1, 2022 by US Global Investors.

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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be suitable for all investors. By clicking on the link(s) above, you will be directed to third-party website(s). US Global Investors does not endorse all information provided by such website(s) and is not responsible for its/their content.

The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. Gross Domestic Product (GDP) is the monetary value of all finished goods and services produced within a country’s borders during a given period, although GDP is usually calculated on an annual basis. It includes all private and public consumption, public expenditure, investment and exports less imports that occur within a defined territory. The Employment Cost Index (ECI) is a quarterly economic series that measures the growth in the total compensation of employees.

Holdings may change daily. Holdings are reported at the end of the most recent quarter. The following securities mentioned in the article were held by one or more accounts managed by US Global Investors as of (06/30/22): Lundin Gold Inc., Lucara Diamond Corp.

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