So when is the recession coming?
Key points at a glance
- Consumption in 2022 held up incredibly well.
- It was boosted by excess savings from the time of the COVID-19 pandemic and a strong labour market. However, both factors are starting to falter.
- Despite everything, the only scenario the equity market seems to be considering is mild recession.
Consumer spending, especially in the U.S., is the backbone of the economy. One look at U.S. GDP will confirm this: at 70%, it accounts for the lion’s share of economic output. The state of consumer spending, therefore, gives a good insight into the state of health of a nation’s economy. In view of the double whammy of higher prices – for instance, for food and gas – and higher interest rates – such as on mortgages – consumer stress has been higher in 2022 than in decades. Despite these annoyances, consumer spending held up incredibly well last year.
U.S. GDP did fall in the first and second quarter, which, according to the rule of thumb, qualified as recession, but the U.S. was not officially in recession. This caused a degree of confusion, as was evident from the number of Google searches for the term “recession”, which shot up at the end of July after the release of the initial estimate for second-quarter GDP. A rule of thumb is therefore not enough; what is needed is a fine sense of understanding. The National Bureau of Economic Research (NBER) has the final say on whether or not the U.S. is in recession. The NBER states that the breakdown of GDP (as well as other factors, such as the labour market) plays a role. In fact, the negative growth in the first quarter was as a result of a trade deficit and the negative growth in the second quarter was mainly attributable to the decline in inventories. However, consumer spending continued to increase strongly throughout the year.
One would have thought otherwise from the adverse environment in 2022. One reason for the strong consumer spending was the excess savings that had been accumulated during the COVID-19 crisis acting as a buffer. The combination of state transfer payments and less spending during the lockdowns greatly increased the size of U.S. citizens’ savings. The U.S. central bank, the Fed, estimates that an extra USD 2.3 trillion was saved in 2020 and 2021. Another reason is that the strong labour market boosted growth in consumption. At the end of the year, the unemployment rate of 3.7% was close to the historical low in past decades. The vast majority of the labour force is therefore in employment.
“It is difficult to imagine a recession without weak consumer spending.”
Philip Bold
However, both factors are starting to falter. The excess savings from the time of the pandemic have been dwindling since the third quarter of 2021. These diminishing extra savings and the economic uncertainty are affecting consumer sentiment. According to a consumer survey conducted by the University of Michigan, willingness to purchase durable household items has recently fallen to historical lows. The same goes for the purchase of other discretionary goods. However, there are also signs of problems with buying everyday items. In the latest household survey by the U.S. Census Bureau, around 40% of respondents said they were finding it difficult to cover ordinary household expenses. The pressure on the low income brackets – those who are living from hand to mouth, so to speak, and who are particularly hard hit by falling real wages – is becoming apparent. At the same time, the labour market is on the turn. Although anecdotes about recruitment freezes and layoffs are coming mainly out of the technology sector, they are happening across the board. Leading labour market indicators – such as initial claims for unemployment benefit – confirm this trend. This will put additional pressure on consumption.
The positive contribution that consumer spending made to GDP in 2022 therefore seems to be touch and go for 2023. And once the labour market turns there will be nothing standing in the way of recession. Or will there? The inversion of the yield curve at any rate shows that bond market participants consider an economic downturn likely. The equity market, on the other hand, lost a lot of ground in 2022, as a result of which valuations have more or less returned to normal; however, an earnings recession on the corporate front would take a greater toll. Although everybody is talking about recession, the equity market, which anticipates real economic development, only seems to be considering a relatively mild recession. Where to for consumer spending?
Author:
Please contact us at any time if you have questions or suggestions.
ETHENEA Independent Investors S.A.
16, rue Gabriel Lippmann · 5365 Munsbach
Phone +352 276 921-0 · Fax +352 276 921-1099
info@ethenea.com · ethenea.com
This is a marketing communication. It is for product information purposes only and is not a mandatory statutory or regulatory document. The information contained in this document does not constitute a solicitation, offer or recommendation to buy or sell units in the fund or to engage in any other transaction. It is intended solely to provide the reader with an understanding of the key features of the fund, such as the investment process, and is not deemed, either in whole or in part, to be an investment recommendation. The information provided is not a substitute for the reader's own deliberations or for any other legal, tax or financial information and advice. Neither the investment company nor its employees or Directors can be held liable for losses incurred directly or indirectly through the use of the contents of this document or in any other connection with this document. The currently valid sales documents in German (sales prospectus, key information documents (PRIIPs-KIDs) and, in addition, the semi-annual and annual reports), which provide detailed information about the purchase of units in the fund and the associated opportunities and risks, form the sole legal basis for the purchase of units. The aforementioned sales documents in German (as well as in unofficial translations in other languages) can be found at www.ethenea.com and are available free of charge from the investment company ETHENEA Independent Investors S.A. and the custodian bank, as well as from the respective national paying or information agents and from the representative in Switzerland. The paying or information agents for the funds Ethna-AKTIV, Ethna-DEFENSIV and Ethna-DYNAMISCH are the following: Austria, Belgium, Germany, Liechtenstein, Luxembourg: DZ PRIVATBANK S.A., 4, rue Thomas Edison, L-1445 Strassen, Luxembourg; France: CACEIS Bank France, 1-3 place Valhubert, F-75013 Paris; Italy: State Street Bank International – Succursale Italia, Via Ferrante Aporti, 10, IT-20125 Milano; Société Génerale Securities Services, Via Benigno Crespi, 19/A - MAC 2, IT-20123 Milano; Banca Sella Holding S.p.A., Piazza Gaudenzio Sella 1, IT-13900 Biella; Allfunds Bank S.A.U – Succursale di Milano, Via Bocchetto 6, IT-20123 Milano; Spain: ALLFUNDS BANK, S.A., C/ Estafeta, 6 (la Moraleja), Edificio 3 – Complejo Plaza de la Fuente, ES-28109 Alcobendas (Madrid); Switzerland: Representative: IPConcept (Schweiz) AG, Münsterhof 12, Postfach, CH-8022 Zürich; Paying Agent: DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zürich. The paying or information agents for HESPER FUND, SICAV - Global Solutions are the following: Austria, Belgium, France, Germany, Luxembourg: DZ PRIVATBANK S.A., 4, rue Thomas Edison, L-1445 Strassen, Luxembourg; Italy: Allfunds Bank S.A.U – Succursale di Milano, Via Bocchetto 6, IT-20123 Milano; Switzerland: Representative: IPConcept (Schweiz) AG, Münsterhof 12, Postfach, CH-8022 Zürich; Paying Agent: DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zürich. The investment company may terminate existing distribution agreements with third parties or withdraw distribution licences for strategic or statutory reasons, subject to compliance with any deadlines. Investors can obtain information about their rights from the website www.ethenea.com and from the sales prospectus. The information is available in both German and English, as well as in other languages in individual cases. Producer: ETHENEA Independent Investors S.A.. Distribution of this document to persons domiciled in countries in which the fund is not authorised for distribution, or in which authorisation for distribution is required, is prohibited. Units may only be offered to persons in such countries if this offer is in accordance with the applicable legal provisions and it is ensured that the distribution and publication of this document, as well as an offer or sale of units, is not subject to any restrictions in the respective jurisdiction. In particular, the fund is not offered in the United States of America or to US persons (within the meaning of Rule 902 of Regulation S of the U.S. Securities Act of 1933, in its current version) or persons acting on their behalf, on their account or for the benefit of a US person. Past performance should not be taken as an indication or guarantee of future performance. Fluctuations in the value of the underlying financial instruments or their returns, as well as changes in interest rates and currency exchange rates, mean that the value of units in a fund, as well as the returns derived from them, may fall as well as rise and are not guaranteed. The valuations contained herein are based on a number of factors, including, but not limited to, current prices, estimates of the value of the underlying assets and market liquidity, as well as other assumptions and publicly available information. In principle, prices, values, and returns can both rise and fall, up to and including the total loss of the capital invested, and assumptions and information are subject to change without prior notice. The value of the invested capital or the price of fund units, as well as the resulting returns and distribution amounts, are subject to fluctuations or may cease altogether. Positive performance in the past is therefore no guarantee of positive performance in the future. In particular, the preservation of the invested capital cannot be guaranteed; there is therefore no warranty given that the value of the invested capital or the fund units held will correspond to the originally invested capital in the event of a sale or redemption. Investments in foreign currencies are subject to additional exchange rate fluctuations or currency risks, i.e. the performance of such investments also depends on the volatility of the foreign currency, which may have a negative impact on the value of the invested capital. Holdings and allocations are subject to change. The management and custodian fees, as well as all other costs charged to the fund in accordance with the contractual provisions, are included in the calculation. The performance calculation is based on the BVI (German federal association for investment and asset management) method, i.e. an issuing charge, transaction costs (such as order fees and brokerage fees), as well as custodian and other management fees are not included in the calculation. The investment performance would be lower if the issuing surcharge were taken into account. No guarantee can be given that the market forecasts will be achieved. Any discussion of risks in this publication should not be considered a disclosure of all risks or a conclusive handling of the risks mentioned. Explicit reference is made to the detailed risk descriptions in the sales prospectus. No guarantee can be given that the information is correct, complete or up to date. The content and information are subject to copyright protection. No guarantee can be given that the document complies with all statutory or regulatory requirements which countries other than Luxembourg have defined for it. Note: The most important technical terms can be found in the glossary at www.ethenea.com/glossary. Information for investors in Belgium: The prospectus, the key information documents (PRIIPs-KIDs), the annual reports and the semi-annual reports of the sub-fund are available in French free of charge upon request from the investment company ETHENEA Independent Investors S.A., 16, rue Gabriel Lippmann, 5365 Munsbach, Luxembourg and from the representative: DZ PRIVATBANK S.A., 4, rue Thomas Edison, L-1445 Strassen, Luxembourg. Information for investors in Switzerland: The country of origin of the collective investment scheme is Luxembourg. The representative in Switzerland is IPConcept (Schweiz) AG, Münsterhof 12, P.O. Box, CH-8022 Zurich. The paying agent in Switzerland is DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zurich. The prospectus, the key information documents (PRIIPs-KIDs), and the Articles of Association, as well as the annual and semi-annual reports, can be obtained free of charge from the representative. Copyright © ETHENEA Independent Investors S.A. (2024) All rights reserved. 04/01/2023