The release of 2Q22 GDP data last week suggested the economy was in a “technical” recession as Real GDP declined for the second consecutive quarter. However, a look at Nominal GDP would suggest otherwise.
QUICK TAKE
The gap between nominal and real (inflation adjusted) GDP growth is at its highest level in over 20 years. The difference in growth rates is substantial and properly reflects the impact inflation is having on the economy. However, we note that in the previous three recessions (2001, 2008 and 2020) both real and nominal GDP declined.
Further, corporate earnings are measured in nominal dollars, which would suggest corporate earnings are continuing to rise and may support market upside. And that would imply consumer demand is strong and the core economy is growing.
Big Picture: The economy is in a “technical” recession but consumer demand remains robust, labor markets tight, and personal balance sheets strong. Given these macro dynamics we continue to believe the Fed’s tightening is having its intended impact on controlling inflation without significantly dampening consumer activity. All of which points to an economy that appears likely to continue expanding, which we think will support markets in the back half of 2022.
ENDNOTES
Disclosures
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A word on risk
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