In Washington circles, saying the “R” word comes with a bit of risk.
As the specter of recession looms over the US economy, defining exactly what one is and when it begins has sparked furious debate — based as much around politics as economics.
Last week, the White House appeared to be trying to get the jump on the possible declaration of a recession in the world’s largest economy — second quarter GDP data is due on Thursday — with a pointed blog post.
The title? “How Do Economists Determine Whether the Economy is in a Recession?”
In the post, President Joe Biden’s team rejects the widely accepted definition of a recession as two consecutive quarters of negative growth — a situation the United States could find itself in as of Thursday.
“While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle,” the White House said.
Of course, opposition Republicans quickly picked up on the spin.
“Newsflash for Joe Biden: You can’t change reality by arguing over definitions,” the Republican National Committee said in a statement on Monday.
– ‘One official arbiter’ –
So beyond the political spin machine, what really is a recession?
“There’s been negative growth in the first quarter of this year. We’ll see what the numbers are… If (the second quarter) were negative, that would technically potentially be a recession,” IMF chief economist Pierre-Olivier Gourinchas said.
In a note on its website, the International Monetary Fund nevertheless insists there is “no official definition of recession.”
“Most commentators and analysts use, as a practical definition of recession, two consecutive quarters of decline in a country’s real (inflation-adjusted) gross domestic product (GDP),” the Washington-based global lender says.
For Gourinchas, “the general assessment as to whether the economy is in a recession overall is a little bit more complex.”
Federal Reserve Chair Jerome Powell said Wednesday the Fed “doesn’t make a judgment on that,” but added: “What a recession really is — it’s a broad-based decline across many industries that is sustained for more than a couple months.”
“The labor market is just sending such a strong signal of economic strength that it makes you really question the GDP data,” Powell said.
David Wilcox, a senior economist at the Peterson Institute for International Economics and at Bloomberg Economics, says that considering an economy as entering recession after two consecutive quarters of negative GDP growth is simply “wrong.”
He says while it’s a “handy rule of thumb,” it’s not gospel.
“I kind of cringe and resist every time I see” that definition, Wilcox told AFP.
“There’s one official arbiter of recession dating in the United States. And that’s the National Bureau of Economic Research.”
– Late to the party? –
The NBER, a private, independent and nonpartisan entity, was founded in 1920 to refine research on the US economy. Its “Business Cycle Dating Committee” uses several data points to determine when the economy is in expansion or recession.
“A recession is the period between a peak of economic activity and its subsequent trough, or lowest point,” the NBER says on its website.
“The NBER’s definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
But because the bureau prefers to base its assessment on solid data and publish its opinion several months after the figures are released, it can seem a little late to the party.
Ellen Hughes-Cromwick, an economist at the Third Way, a center-left think tank, says that the NBER’s traditional delay is “not a problem” but rather a “methodology” that allows the bureau to avoid repeated revisions.
“What is common knowledge among economists is that in that preliminary estimate, they have less than 50 percent of actual statistics to measure second quarter GDP,” she explains.
“In other words, 50 percent of that GDP preliminary estimate… are estimates,” adds Hughes-Cromwick, who worked as an economist under presidents Ronald Reagan and Barack Obama.
Translation: the NBER is perhaps totally justified in taking its time.
Sony trims annual profit forecast after Bungie purchase
Sony trimmed its annual net profit forecast on Friday, partly due to acquisition expenses including the purchase of US game studio Bungie, creator of hits like “Halo” and “Destiny”.
The PlayStation maker announced in February it would buy Bungie for $3.6 billion, weeks after rival Microsoft unveiled a landmark pact to acquire “Call of Duty” maker Activision Blizzard.
Microsoft says its massive merger, valued at around $69 billion, will make it the third-largest gaming company by revenue, behind Tencent and Sony — marking a major shift in the booming gaming world.
Sony Group now predicts net profit for 2022-23 will total 800 billion yen ($6 billion), down from the 830 billion yen previously forecast.
It said the expected increase in acquisition expenses was “mainly due to the acquisition of Bungie, Inc. being completed earlier than the assumed timing”.
Lower sales of games by non-house developers will likely dent its overall sales figures this financial year, it said, but this would be “partially offset” by a weaker yen.
Exchange rates also boosted the conglomerate’s movie segment, chief financial officer Hiroki Totoki told reporters.
Customer traffic at US theatres has returned to pre-pandemic levels in some weeks, and Sony Pictures is hoping to score another box-office win after the runaway success of “Spider-Man: No Way Home”.
“We have high hopes for ‘Bullet Train’ featuring Brad Pitt,” Totoki said.
The movie division expects higher sales for anime streaming, “including the impact of the acquisition of Crunchyroll”, the world’s largest online library of Japanese animation.
– PlayStation 5 sales steady –
In the April to June quarter, the Japanese conglomerate posted a three percent year-on-year rise in net profit to 218 billion yen, with sales up around two percent to 2.3 trillion yen.
Sony has faced challenges rolling out its PlayStation 5 console, which remains difficult to get hold of more than 18 months since its launch in November 2020, in part due to pandemic supply chain disruption and the global chip shortage.
Sony sold 11.5 million PS5s last year, and in May Totoki said the firm was adapting to try and weather ongoing supply chain issues, including Covid-19 lockdowns in China.
For the PS5, “the problem is more about supply than demand. The company is also facing problems transporting its products,” Hideki Yasuda, senior analyst at Toyo Securities, told AFP before the earnings release.
Meanwhile “the yen has turned lower in this quarter. This should be positive for the company,” he said, adding that a US economic slowdown could open up shipping spots, even though it poses risks overall for businesses like Sony.
In the first quarter of this financial year, Sony sold 2.4 million PS5 units, similar to the same period last year when it sold 2.3 million.
Sony also said last month it is launching a new brand that will offer PC gaming gear.
The gaming peripherals market of items used by players was valued at $3.88 billion globally in 2019 according to Grand View Research.
Asian markets rise as US data boosts hopes of slower Fed hikes
Asian stocks rose Friday after data showing another contraction in the US economy boosted hopes that the Federal Reserve will slow its pace of interest rate hikes.
After an extended period of pessimism on trading floors fuelled by soaring inflation and the central bank’s monetary tightening campaign, investors are beginning to speculate that the market may have reached its nadir.
The world’s top economy shrank 0.9 percent in April-June following a 1.6 percent retreat in the first quarter as it was buffeted by the four-decade spike in inflation and rising borrowing costs.
But the reading was taken as a sign of good news, as it could give the Fed room to take its foot off the pedal, with Treasury yields — considered a barometer of future interest rates — easing.
Officials are expected to continue lifting rates, but analysts estimate they will announce a 50-basis-point rise in September, compared with 75 at the past two meetings.
And analysts said the quick, sharp pace of increases would allow the bank to begin cutting sooner in 2023 while others said any recession would likely only be shallow and short.
The news saw all three main indexes on Wall Street rally more than one percent, with tech firms — which are susceptible to higher rates — leading the way.
The gains extended a rally Wednesday that came after Fed chief Jerome Powell hinted that the bank could start to take it easier in its tightening.
Most of Asia followed suit, with Tokyo, Sydney, Seoul, Singapore, Taipei, Jakarta and Wellington all up. However, Hong Kong dropped and Shanghai struggled.
The prospect of US rates not rising as fast as previously expected hit the dollar, which has soared in recent months against most other currencies.
The greenback dropped below 135 yen Thursday for the first time since July 6, having hit a 24-year high of 139.39 yen just two weeks ago.
A second successive contraction is widely considered a technical recession, though it is not officially considered so in the United States until identified as such by the National Bureau of Economic Research.
But while debate rages over that issue, the general consensus is that the economy is struggling.
“The more important point is that the economy has quickly lost steam in the face of four-decade high inflation, rapidly rising borrowing costs, and a general tightening in financial conditions,” Sal Guatieri, of BMO Capital Markets, wrote.
The retreat in the US economy comes as China also struggles, hit by painful Covid-induced lockdowns in major cities including Shanghai and Beijing that hammered all sectors and supply chains.
On Thursday, the country’s leadership offered a dour assessment of the world’s number two economy but offered no plans to stimulate growth, leaving traders disappointed.
– Key figures at around 0230 GMT –
Tokyo – Nikkei 225: UP 0.5 percent at 27,944.55 (break)
Hong Kong – Hang Seng Index: DOWN 1.4 percent at 20,343.08
Shanghai – Composite: DOWN 0.4 percent at 3,269.18
Dollar/yen: UP at 134.36 yen from 134.25 yen Thursday
Euro/dollar: DOWN at $1.0193 from $1.0197
Pound/dollar: DOWN at $1.2167 from $1.2177
Euro/pound: UP at 83.77 pence from 83.70 pence
West Texas Intermediate: DOWN 0.8 percent at $97.16 per barrel
Brent North Sea crude: UP 0.3 percent at $107.50 per barrel
New York – Dow: UP 1.0 percent at 32,529.63 (close)
London – FTSE 100: FLAT at 7,345.25 (close)
Amazon tops expectations as quarterly sales climb
E-commerce colossus Amazon on Thursday reported that its sales in the recently ended quarter grew more than expected despite inflation and other economic turmoil.
Amazon sales topped $121 billion in the quarter, but the company logged a loss of $2 billion dollars as it continued to work to rein in costs — but its shares still jumped 10 percent in after-hours trading.
A crowded period of earnings from the world’s biggest tech firms has mostly disappointed, but investors have seemed relieved the news was not worse.
Recession fears, a strong dollar, shrinking advertising budgets and inflation — tech companies’ pandemic-era booms have now tipped into a downturn.
Microsoft and Facebook-owner Meta both cited the harm to their business from a strong dollar, with the social media giant pointing to the greenback’s role in the firm’s first year-on-year revenue decline since going public in 2012.
In addition to the generally bumpy economic times, firms such as Netflix and Meta are fighting fierce competition from rivals — and both reported losing some ground.
Meta lost about two million monthly users between quarters, and Netflix shed nearly a million paying customers, which was less than expected.
Yet Netflix stock is up about a percent in the past five days, with investors potentially hopeful after the firm projected a coming rebound in subscribers.
Markets seemed similarly assuaged despite Google parent Alphabet missing on revenue and profit.
The Silicon Valley giant’s bad news was not unexpected, as the flow of online ad dollars that fuels the company’s fortunes has slowed as inflation, war and other troubles vex the overall economy.
“Still, with its tremendous market share in search advertising, Google is relatively well positioned to weather the rough waters that lie ahead,” said analyst Evelyn Mitchell.
As advertisers have tightened their belts, and Apple’s privacy changes have bitten into firms’ sales of costly but highly targeted ads, the damage was uneven.
Meta’s income has taken a beating, and with a share price that has lost about half its value since February, it’s clear that investors are still wary about the company’s future.
Analysts noted Meta’s reported 14 percent drop in average price per ad was a steep change coming on top of the first quarter, when ad prices dipped 8 percent.
“The good news, if we can call it that, is that its competitors in digital advertising are also experiencing a slowdown,” said analyst Debra Aho Williamson.
Snapchat’s parent firm, for example, reported that its loss in the recently ended quarter nearly tripled to $422 million despite revenue increasing 13 percent under conditions “more challenging” than expected.
“We are not satisfied with the results we are delivering, regardless of the current headwinds,” California-based Snap said in a letter to investors last week.
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