Here are 3 big reasons why a 2022 recession would be unlike any other

No two recessions are the same. But the potential 2022 recession looks like the most unique we’ve ever seen.

Some traditional signs of an economic downturn are already upon us. US GDP has shrunk for two consecutive quarters – the classic definition of a technical recession.

Meanwhile, homebuilding activity has fallen while consumer confidence is at its lowest level since the start of the pandemic. However, President Joe Biden said on Thursday the nation remains “on track.”

Here are three big reasons why the coming recession is different.

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The labor market is strong

In most recessions, economic output and employment decline simultaneously. Falling incomes are forcing businesses to downsize, leading to rising unemployment. Ultimately, higher unemployment leads to lower consumer spending and this creates a vicious circle.

In 2022, however, unemployment is still at an all-time high. The official unemployment rate in June was 3.6% – the lowest since February 2020. A robust labor market is “historically unusual” in a recession, according to economists at Goldman Sachs.

This exceptionally strong job market could draw its strength from another unusual source: the financial strength of companies.

Businesses are cash rich

Businesses see lower sales and lower profits during recessions. This process may have already started. However, corporate America is maintaining profits and sitting on a huge cash hoard before this recession.

The after-tax profit margin of an average US corporation is around 16% right now. In traditional recessions, this rate drops to single digits. Meanwhile, these companies collectively have more than $4 trillion in cash. This is a record high and also very unusual for a recessionary environment.

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Companies may have raised these funds in the era of easy money and low interest rates over the past decade. Now, this cash acts as a buffer and could allow companies to retain their staff despite the economic downturn. Rates are rising

Another unusual factor in this recession is the Federal Reserve’s hawkish stance. In most recessions, the central bank cuts interest rates and pumps more money into the economy to stabilize it.

In 2022, however, the Fed raised rates aggressively to curb inflation. Given the strength of the labor market and corporate balance sheets, the central bank may have more reason to continue raising rates.

What happens afterwards?

“It’s not sustainable,” says Jon Hilsenrath of the WSJ. He believes that one of two things must happen to resolve this misalignment: either the economy recovers quickly, ending the recession, or the economy continues to plunge, forcing employers to cut jobs.

These two scenarios could potentially be the “soft landing” and “hard landing” that the Fed has previously mentioned. Investors should keep an eye on all the indicators to see what scenario is playing out as the impact could be severe.

This could be a great time to bet on battered growth and tech stocks in the event of a soft landing. However, in a hard landing, investors might need to take refuge in defensive asset-backed stocks like healthcare companies and real estate investment trusts.

Either way, 2022 is shaping up to be an interesting year for investors.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.