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Are We In a Recession?

Are We In a Recession?

September 19, 2022

On August 17, 2022, we held a webinar to discuss the state of the economy and stock market. A major question was “Are we in a recession?” It is now a month later. We will discuss this topic with graphs, updated as of September 19, plus the latest information on the state of the economy will be included.

In this blog, you’ll learn:

  • Federal Reserve Stimulus
  • Changes in Interest Rates
  • The Impact of Stimulus on the U.S. Stock Market
  • Inflation Updated Through August
  • What Is a Recession?
  • Are We in a Recession?
  • Where Do We Go from Here?

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Federal Reserve Stimulus

A good way to see the amount of stimulus from the Federal Reserve is to look at the size of their balance sheet to notice if it is increasing or decreasing.

When the Fed balance sheet is increasing, they are primarily buying government treasuries, which is called Quantitative Easing. The Fed is buying bonds to injecting money into the economy.

When the Fed balance sheet is decreasing, it is called Quantitative Tightening. The Fed is taking money out of the economy to slow it down. This is primarily done by letting treasury bonds expire and not purchasing new ones to replace them.

Federal Reserve Balance Sheet (Trillions of Dollars)

Federal Reserve Balance Sheet
Source:  Federal Reserve1

On June 1, the Fed began shrinking its balance sheet at a pace of $47.5 billion per month and on September 1, 2022, the pace doubled to $95 billion. People in the news often talk about the Fed rising interest rates, but rarely is the Quantitative Tightening discussed which can have a major impact on slowing down the economy.

Changes in Interest Rates

 Another way the Federal Reserve can impact the economy is by raising and lowering the Fed Funds interest rate. This is the interest rate for overnight lending among U.S. banks and impacts bonds of all different durations, including 30-year mortgages for homes.

The Fed Funds rate is currently 2.25% 

Federal Funds Effective Rate
Source:  FRED (Federal Reserve Economic Data)2

On September 21, Chairman of the U.S. Federal Reserve announced that they were raising the Fed Funds Rate 0.75% to 3.00%. A website from the Chicago Mercantile Exchange (CME) tracks the probability of future Federal Reserve rate hikes1 hourly and daily. As of September 28, the probability of rate increases is as follows:

  • November 2, 2022: 62% chance of raising rates to 3.75% rate and 38% chance of raising rates to 3.5%. This would be another increase of 0.75% or 0.5%.
  • December 14, 2022: 56% chance of raising rates to 4.25% and 41% chance of raising rates to 4.00%. This would be another increase of 0.5% from 3.75% or from 3.5% if going to 4%.

Government Stimulus

Another form of economic stimulus can come from the Federal Government, in new laws passed by Congress. Since the start of the COVID pandemic, there have been many stimulus bills created and sponsored by Democrats and Republicans.

Some of the major laws include the following:

Major Government Stimulus Legislation Chart

The stimulus bills were intended to help the country through the COVID 19 pandemic. One of the things it did was to provide money to lower and middle-income people in the US through the form of checks sent directly from the U.S. Treasury Department to people’s checking accounts. We can see a significant increase in the personal savings rates in early 2020 and early 2021, just after stimulus checks were distributed from the very large stimulus bills passed in March 2020 and again in March 2021.

FRED Personal Savings Rate
Source:  FRED (Federal Reserve Economic Data)4

Congress has shown less interest in passing stimulus bills in recent months and we will have to see what affect changes in Congress due to the November election will have on future legislation.

The Impact of Stimulus on the U.S. Stock Market

Below is a graph of the S&P 500 for the past few years:

S&P 500 Total Return - 5 Year
Source: - September 19,2022

Next is the same graph, but with a line drawn from the points at the top of the market prior to COVID:

S&P 500 5 Year - If Never a Pandemic
Source: - September 19,2022

Notice the line ends in the same place as the current market. If there were never a COVID pandemic, might we have ended up at the same place in the market as we are today?

The same graph is shown below, but now a line is drawn to show the steeper rise of the market after the start of the COVID pandemic. So, let’s think about this for a moment. There was a worldwide pandemic, the economies of the world were shut down and the stock market started going up faster. Does that seem inconsistent?

S&P 500 Total Return - 5 Year - Impact of Stimulus
Source: - September 19,2022

Remember that after the pandemic started, the Federal Reserve and the U.S. Federal government poured trillions of dollars of stimulus into the economy for two years. More recently, the Federal Reserve and U.S. Federal Government have stopped providing stimulus. And amazingly enough, the market came down to the same trend line that was in place before the pandemic and before all the stimulus programs.

S&P 500 5 Year - Stimulus Gain
Source: - September 19,2022

One way to look at the market is to say that the excess that was created during the pandemic, due to all the stimulus, has come out of the stock market after the stimulus was removed.

Inflation Updated Through August

The trillions of dollars used for stimulus by the Federal Reserve and U.S. Federal Government was primarily done through debt. The U.S. Federal Government issued Treasury Bonds to pay for all the stimulus and the Federal Reserve bought most of the Treasury Bonds, as seen by the increase in the balance sheet for the Federal Reserve. Not surprising then to see that having to borrow money, to spend trillions of dollars that the U.S. Government does not have, has resulted in the highest levels of inflation in decades.

On September 13, the Bureau of Labor Statistics (BLS) reported that the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1 percent in August, on a seasonally adjusted basis after being unchanged in July. The “All items” index increased 8.3% before seasonal adjustment.

Consumer Price Index
Source:  Bureau of Labor Statistics5

The U.S. stock market reacted very poorly when the news was announced on September 13, with a sell-off of 4-5% on the major indexes. Optimistic investors may have been hoping to see a decline in the inflation rate. The implication of this increasing inflation rate is that the Federal Reserve may have to increase the Fed Funds rate more than expected to drive the inflation rate down to the Federal Reserve’s target of 2-3 percent. What we have seen is this cycle of stimulus from the Federal Reserve and U.S. Federal Government drove up the personal savings rate and the U.S. Stock Market, which then resulted in higher inflation.

What Is a Recession?

A big question now is whether the Federal Reserve can increase interest rates enough to drive inflation down to their target of 2-3%, without causing a significant downturn that turns into a recession. Let’s start by looking at “What is a recession?”

A common definition of a recession is two quarters of negative GDP. The organization that officially determines if there was a recession is the National Bureau of Economic Research (NBER). They define a recession on their website ( as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”. Next, let’s look at where the economy is today.

U.S. GDP Growth Rate

For the last two quarters, the GDP growth rate has been negative, so it fits that part of the definition.

US GDP Growth Rate
Source:  Bureau of Labor Statistics5

U.S. Unemployment Rate

The Unemployment rate has not started rising in any meaningful way, but this is a lagging indicator that can take many months to rise after the economy starts to slow.

FRED Unemployment Rate
Source:  FRED (Federal Reserve Economic Data)6

Are We in a Recession?

So, an important question many people are asking is “Are we in a recession?” In a statement on August 8, 2022, the Federal Reserve Bank of Dallas published an article titled “U.S. Likely Didn’t Slip into Recession in Early 2022 Despite Negative GDP Growth.

BlackRock has a 5-point dashboard to determine whether the economy is in recession. Lending Standards, Industrial Production and Small Business Optimism have deteriorated to the point of concern about recession. Unemployment rate and personal income have not yet declined, and they think it is a little early to state that we are in recession.

Fidelity has a Business Cycle Framework for the major economies of the world and the graph below shows the U.S. economy weakening, but not yet at the bottom.

Fidelity Investments Business Cycle Framework
Source: Fidelity Investments

So, we will let you be the judge. Do you think the U.S. economy is in recession?

Regardless of the technical definition of a recession, we believe the U.S. economy will weaken from further rate increases by the Federal Reserve. We are starting to see clients, and people we know get laid off from their jobs. If we ask them, based on their personal situation, they may feel like the economy is in a recession. We are also hearing from employees at big tech companies in Silicon Valley that these companies are freezing hiring and cutting discretionary spending on things like marketing.

Where Do We Go from Here?

Over the past year, the U.S. stock market has sold off considerably, with the stock of some quality companies down 50, 60, 70 and even 80%. We continue to watch the market daily for opportunities as stocks are looking much more attractively priced than they were at the start of the year. We have added funds that are less volatile to provide a smoother ride through this volatile market. Stocks can recover more quickly so we prefer to reduce rather than eliminate stock market risks.

We still do not own any bond funds for our clients which continues to fall to lower levels. If the Federal Reserve continues to raise interest rates in the next few months, then we expect bonds to fall further. But we think that with the lower prices of bonds, and the higher interest rates they are paying, by year-end bonds could be at the most attractive point they have been in decades.

There was a possibility of the Federal Reserve slowing down the increase if inflation was coming down but after the report on September 13th, it doesn’t look like the risk to the bond market has reduced. Look for an update on the bond market in a blog soon.

We are watching the news daily to look for signs of a weakening economy and possible recession ahead and manage through this. We think that volatility will continue in the market for the next few months. Historically the last few months of the year, and the few months after a national election, are good months for the market and will continue to watch closely for opportunities.

If you have questions on how the topics in this article could impact your portfolio, give your Wealth Manager a call.  

Financial Journey Partners

Financial Journey Partners - Partners in Your Financial Journey®

Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.

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The information provided in this article are being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index.


1 Federal Reserve – Recent Balance Sheet Trends

2 FRED – Federal Reserve Effective Rate

3 CME Group – CME FedWatch Tool

4 FRED – Personal Savings Rate

5 US Department of Labor, Bureau of Labor Statistics – Consumer Price Index

6 FRED – US Unemployment Rate