From the desk of Willie Delwiche.
Identifying recessions is an academic exercise for historians. It usually requires the passage of time to gain the necessary perspective. The December 2007 business cycle peak was not identified as such (by the NBER) until December 2008. While June 2009 would eventually be identified as the business cycle trough, NBER did not make this determination until September 2010.
For those allocating capital in real-time, this becomes more than just an academic discussion. Whether the economy is in recession or not can impact the length and severity of bear markets. Bear markets that occur independent of recession tend to last 7 months, with an average peak-to-trough drawdown of 23%. If there is a recession involved, bear markets tend to last for well over a year and the average pullback is 33%. The recession question was a hotly debated topic in early 2008 and there are certainly echoes of those conversations now.
The Fed and other central banks are still aggressively raising rates even as growth slows dramatically. Manufacturing and New Orders indexes from the Richmond Fed (showing activity for June) are at levels never seen outside of recessions. Time will tell whether the NBER eventually labels this environment a recession – but incoming data and financial market activity suggest that’s becoming more likely.