The Independent Market Observer

Are We in a Recession or Not?

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jul 28, 2022 2:42:35 PM

and tagged Commentary

Leave a comment

recessionThe first estimate of national economic growth, the gross domestic product (GDP), came in this morning at an annualized, quarter-on-quarter growth rate of –0.9 percent. This is better than last quarter’s number of –1.6 percent, but it is still the second quarter in a row of decline. By some definitions, this means we are now in a recession, and you can expect to see that all over the headlines in the next several days.

Recession Defined

But before you get too upset, you need to know a couple of things. First, the formal definition of a recession isn’t that simple—and by that definition, we are not in a recession yet. Second, when you look at what caused those declines—in both quarters—they are not what drives a real recession, but are more in the nature of technical adjustments. So for two reasons, what we have here is more of a technical recession than a real one, if you even want to call it a recession.

A recession, to the average person, is when the economy shrinks. So far, so good. But what shows up to the average person when the economy shrinks are job losses, stores closing because people aren’t shopping, and in general the kind of misery that affects the average person.

Slow Growth Is Still Growth

But when we look around, that is not what we see. Job growth remains strong, with millions of excess job openings available and voluntary quit rates still close to all-time highs. Consumer spending is still growing, albeit at a slower rate, and business investment was basically flat. Yes, inflation has hurt confidence, but for real things the economy continues to grow in ways we don’t see in a recession.

Another way to understand that is to look at gross domestic income (GDI), the much-less-reported twin to GDP. GDP is purchases, and GDI is income. In theory, they have to be equal. They usually are quite close, but this year so far we have a discrepancy with GDP down while GDI is up. In the past, when this kind of gap has opened, GDP has often ended up being revised to match GDI, suggesting that might happen this time as well. Growth in income usually means growth overall.

And that is what we see on a longer-term basis. The quarter-on-quarter number, annualized, is what is reported, but the year-on-year number (i.e., where the economy is now compared with where it was a year ago) still shows growth. Slower growth, but still growth.

Why the Negative Numbers?

In both the first and second quarters, the negative numbers were due to adjustments in the aftermath of the pandemic, rather than real economic weakness. In the first quarter, exports dropped enough to take overall growth negative (but have since rebounded). In the second quarter, much of the weakness came from businesses continuing to cut their inventories, not because of sales declines, but because as the economy continues to recover from the pandemic, what people are buying has changed. Once that adjustment is completed, that too should reverse. In both cases, this is a post-pandemic adjustment, rather than something worse. As such, this looks more like a technical recession, at worst, than a real one.

Make no mistake, the data is showing a slowdown. Growth has slowed across the board and will likely continue to do so. We could be looking at a real recession sometime in the next year or so. But despite the numbers, we are not there yet.

Job growth is still strong, which doesn’t happen in a recession. Businesses are still investing (ditto). National income is still growing (ditto). If this is a recession, it is better in many respects than many non-recessionary periods we have seen in the past decade.

The Bottom Line

Whatever we call it, it doesn’t matter. The facts are the economy is in better condition than the headline numbers suggest. Despite inflation and everything else, the average person is still able to work and shop. And if that is as bad as this “recession” gets? We will be pretty lucky.

Subscribe via Email

Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®