recession?

I’m not sure where the idea that two consecutive quarters of real GDP decline is what makes a recession. It’s what I learned early in my career. I don’t know when it was abandoned. But it makes sense to put it in file 13 in the present US, since maximum sustainable (meaning non-inflationary) real GDP growth is currently 1%-ish. Not a great deal of difference between that and being in the minus column. This is very different from the 1990s, when US real GDP exceeded the 4% growth mark six times and the worst year was +1.2%. Back then, being in negative territory would have meant a huge economic disruption.

I look a bit differently at where the US is currently rather than through the recession/expansion lens. If we take real GDP at the end of 2018 and project forward at a 1% annual growth rate, the economy should be about 4% larger now than it was back then. It’s actually about 6% bigger. That’s despite the pandemic and the Russian invasion, and because of some combination of our own resilience and the massive Biden stimulus.

To my mind, this means that to get the country back to a non-inflationary path, we’ve got to shrink GDP by 2%. GDP in 1Q22 was -1.6% and -0.9% in 2Q22. If we did this for four more quarters, we’d be back where we should be. Earnings reports are beginning to tell us, however, that the US economy is starting to shift into a lower gear.

WMT and ZIP

Both companies reported overnight. WMT, the country’s largest retailer, reported better than expected earnings for the June quarter, although it said customers are shifting from discretionary items to food and from brands to private label. The stock is up by about 6% as I’m writing this. ZIP, a large online employment agency, said the new hiring business, especially among smaller customers, began to weaken in June and has stayed soft since. The stock is off its lows but still down by about 5%.

I’m not sure why there’s the performance difference between the two. If I were forced to make something up, I’d say that the WMT results were better than feared, that it’s a known quantity and relatively defensive. ZIP, on the other hand, is a recent listing, is not well covered on Wall Street, and is in an industry that’s perceived as cyclical. Earnings are going to be fine here as well, but if I understand the conference call transcript I read this morning correctly, that’s apparently because the company is going to cut expenses.