1Q 2022 GDP was -1.6% and 2Q is tracking below 0%, putting the U.S. at risk of a technical recession. Although hot inflation and rapid Fed tightening remain headwinds, overall spending, jobs, activity indicators, and the yield curve do not imply a recession in 2022.

The U.S. economy is starting to sputter. The Federal Reserve’s (Fed) “nowcast” of U.S. second quarter GDP growth is -1.0%, putting the economy at risk of a technical recession.1 However, while there is some noticeable deterioration in the economy, the National Bureau of Economic Research (NBER) is unlikely to declare a recession for early 2022, given:

• The labour market is still tight, with two job openings per unemployed worker.
• Consumers are still spending, albeit at a slowing pace.
• ISM (Institute for Supply Management) indices are falling, but still within expansion territory.
• An inversion of the 10y-3m yield curve, which has preceded every recession since the 1970s, has not yet occurred.

Nonetheless, headwinds slowing economic activity remain. High food and energy prices will continue to crimp household budgets, while companies, struggling to pass higher input costs to newly price-sensitive consumers, could see profit margins suffer. In addition, with inflation stubbornly elevated and yet to peak, the Fed will need to hike faster and higher, significantly exacerbating the cracks forming in the economy.

Recession is unlikely in 2022. Yet, the deteriorating backdrop, coupled with more aggressive Fed tightening, means that the U.S. economy and the investment environment will undoubtedly be challenged. Investors should refocus their portfolios towards stability and high quality as they approach the impending storm.