The most recent U.S. real GDP release has created a debate over whether or not the U.S. economy is in a recession and the implications this has on future outcomes. There have been similar periods that were considered shallow or technical recessions that still experienced sizeable negative outcomes for corporate profits which contributed to weaker labor market conditions.
The second quarter GDP update showed that economic activity contracted quarter over quarter for the second consecutive quarter. This has created debate over whether or not the U.S. economy is in a recession, and if so, how deep and how long will it last. We looked at some other recent periods that were considered to be mild recessions to show what impact this had on corporate profits and the labor market.
In 1990, real GDP in Q3 was 0.06% above Q2 and then contracted in Q4 and Q1 1991, and the U.S. economy was deemed in a recession from Q3 1990 through Q1 1991.
During this period, S&P 500 earnings per share in dollar terms dropped from a peak of $24.26 in 1989 to a low of $17.33 in 1992, a -28% decline.
Labor market data also deteriorated. Initial jobless claims increased from 350,000 to 510,000 (a 45% increase), total employees declined from 109.85 million to 108.25 million (-1.5% decline), the labor force participation rate declined from 66.8% to 66.0%, and unemployment increased from 5.2% to 7.8%.
In 2001, real GDP contracted in Q1 on a q/q basis, increased in Q2, contracted again in Q3, and rose slightly in Q4. The U.S. economy was deemed to have been in a recession from Q2 through Q4 2001.
S&P 500 earnings per share in dollar terms peaked in 2000 at $51.49 and dropped to a low of $27.03 in 2002, a -47.0% decrease.
Labor market data also contracted in the early 2000’s. Initial jobless claims increased from 320,000 to 520,000 (a 62.5% increase), total employees declined from 132.8 million to 130.1 million (a -2.0% decline), the labor force participation rate declined to 65.8% from 67.3%, and the unemployment rate increased from 3.8% to 6.3%.
The growth rate of S&P 500 earnings per share will likely decelerate in 2022 compared to 2021 based on how strong earnings growth was in 2021 compared to 2020. Using the 1990 and 2001 examples, the absolute dollar value of earnings per share could decline by -30% from the 2021 peak to the eventual bottom. Labor market data could also decelerate. Based on the average changes in 1990 and 2001, initial claims could increase to 400,000 from the current level of 255,000, the total number of people employed could decline by 2.3 to 3 million, the labor force participation rate is still a 1% below the 2020 peak and could decline another 1-1.5%, and the unemployment rate could increase from 3.6% to 5.6%.
This analysis shows that corporate profits can experience significant declines, leading to contractions in labor market data, even if the economy is in a shallow recession compared to historical examples.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC