Short and concise analysis on concepts or recent events in the financial markets from the ASG Capital Team.
The topic of today, December 2022, is about the possibility of a US recession coming to us in the coming year.
A recession or slowing economic activity is usually represented by a reduction in aggregate demand relative to a prior period. Aggregate demand or consumption is a 2/3 plus component of gross domestic product. If it slows then the growth in GDP slows also.
One of the main drivers of aggregate demand is collective wage growth across the country based on wage increases on the one hand and employment conditions on the other. In addition, one needs to account for the increase in credit. If all these factors are well positioned, then we can expect economic growth. If not, the inverse will be the case.
As unemployment starts to rise, wages tend to stagnate, leading to reduction in aggregate demand and consumption, for example. Likewise, a reduction in credit availability tends to weigh negatively on the growth of aggregate demand.
Employment and wage growth are part of the natural business cycle. As for the expansion of credit, it depends primarily on confidence. Are borrowers confident on their capacity to pay back a loan from a future revenue stream? Our lenders, usually commercial banks confident the borrowers revenue stream will be there to pay back any new loan.
In sum, wage increases, employment conditions and credit expansion work together to sustain economic activity.
In the fall of 2022, the first signs of a reduced wage expansion have started to appear. Furthermore, the US property market, an asset class extensively used as collateral for many new loans, is also showing signs of slowing down. Finally, new credit is becoming more difficult to obtain from the banking sector.
These markers are pointing to a slowing aggregate demand rolling out in the coming months. They should confirm if the country is moving towards a more recessionary environment. In the meantime, the inverted US interest rate curve is already signaling the rising likelihood a recessionary scenario will take place sometime in 2023.
This podcast is for information only. It should not be considered as investment advice. We would recommend seeking professional investment advice for positioning to benefit from an expansionary or recessionary environment.