Mitch on the Markets

May 9th, 2022

Does the Economy’s Contraction in Q1 Signal a Recession?

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The news caught many investors and even economists off guard – U.S. gross domestic product (GDP) contracted at a -1.4% annual rate in Q1 2022, which also marked a drastic turn from the 6.9% annual growth rate registered in Q4 2021. The U.S. economy was supposed to be firmly in growth mode, with Zacks projecting ~3% GDP growth for the full-year 2022.1

So, what happened? And should investors be worried?

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Are Your Investments Protected from a Potential Recession?

The beginning of 2022 hasn’t been easy on investors. The market has been experiencing extreme volatility and it’s affecting many investing decisions. But, as worries and recession fears rise, I recommend taking the necessary steps to keep your investments on track through these difficult times.

Instead of letting fearful headlines cause you to make knee-jerk responses, I am offering all readers our just-released Stock Market Outlook report to help your preparation. This report contains some of our key forecasts to consider such as:

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IT’S FREE. Download the Just-Released May 2022 Stock Market Outlook2

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There were many factors that pulled the U.S. GDP number lower in Q1 2022, and I would argue that investors should not be too worried about any of them. There were three main detractors of the GDP headline figure:

  1. Trade Deficit – Imports are subtracted from GDP figures while exports are added. Imports often make their way into other parts of GDP, most notably in consumer spending, which is the reason they detract from GDP. But as I have written before, investors should not get too fixated on trade deficits as a measure of an economy’s overall health. What matters more is total trade, which gives a better indication if more goods and dollars are trading hands overall.

To that point, total trade was up solidly in Q1. The imports of goods soared 11.5% to $294.6 billion, while the exports of goods also rose 7.2% to $169.3 billion. The fact that imports rose at a much faster clip than exports is a negative for GDP calculations, but does not necessarily signal trouble in the economy. In fact, trade has subtracted from U.S. GDP growth for the last six quarters, which has been a strong period overall for growth.

In my view, none of the above three factors are recessionary at these levels, and a closer look at the most meaningful components of GDP– consumer spending and private sector demand – show very solid strength.

In the first quarter, consumer spending grew at a 2.7% annual rate, and spending accelerated from Q4 2021. It is worth mentioning again that GDP grew 6.9% in Q4 2021, meaning that consumer spending accelerated from already strong levels.

We also note consumers shifted spending materially in Q1 from goods to services, which is a trend that should help ease inflationary pressures in the coming months. A prime example is rising spending on travel and hospitality – U.S. hotel occupancy was at 65.8% in the last week of April, which is up from 49.6% at the end of January. The Transportation Security Administration (TSA) also reported that 2.1 million travelers passed through security in late April, up from 1.4 million in January.

Private sector demand showed strengths in other categories as well, with business investing rising at a solid clip. Investments in areas like software, equipment, and research grew 9.2%, contributing to the 3.7% annualized increase in overall private demand. These data readouts are not the stuff of recessions. Far from it, in my view.

Bottom Line for Investors

Here is some final data to consider: the Conference Board’s Leading Economic Index (LEI), which has historically been a reliable harbinger of economic conditions that lie ahead. While imports, government spending, and inventory investment were all detracting from GDP, the LEI continued to show a U.S. economy that was firmly in expansion mode. LEI increased by 0.3% in March, which followed a 0.6% increase in February and also marks a 1.9% increase over the past six months. 3

A negative GDP reading for one quarter may make the U.S. economy look weak, but that does not mean it is weak.

No one knows what’s in store for the market for the remainder of the year. So, instead of worrying and exiting the market out of fear, I am offering all readers our just-released Stock Market Outlook Report to help you better prepare your investments during this difficult time.

This report contains some of our key forecasts to consider such as:

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! 

Disclosure

1 Wall Street Journal. April 28, 2022. https://www.wsj.com/articles/us-economy-gdp-growth-q1-11651108351

2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.

3 The Conference Board. April 21, 2022. https://www.conference-board.org/topics/us-leading-indicators

4 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.


DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

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