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Amidst worries of a recession in the U.S. due to high oil prices ushered in the aftermath of the Russian invasion of Ukraine, one billionaire believes that the fears should not be as strong as they currently are. Bill Ackman of the hedge fund Pershing Square laid down his reasons for believing that the record inflation that consumers in America are currently suffering from makes it impossible for the annual GDP to grow at a pace that keeps up with the price increases.
He also outlined that the growth in spending and strong employment are two factors that need to be kept in mind when analyzing economic output at a time when record oil prices have hit wallets hard just as America started to recover from the effects of pandemic-induced lockdowns.
Bill Ackman Believes Record Inflation Puts Unrealistic Demand On GDP Growth
The hedge fund billionaire started out by defining a recession according to the commonly accepted definition of two consecutive quarters of negative GDP growth. He then paired this with the current inflation in the U.S., touching nearly 9% for a record high of four decades to state that it is unreasonable to expect both the economy and spending to grow at a similar pace.
He outlined that for the nominal GDP, which is the output of goods and services without removing the effects of high prices, growth right now has to be higher than 8.6% if the real GDP, which removes the effects of price growth, were to grow.
Continuing, Mr. Ackman argued that the definition of a recession that considers two quarters of negative growth is unreasonable because of the high inflation. He bolstered his claim by suggesting that even if nominal spending grew at 8% during the previous two quarters, the economy would still be in a recession, which to him, does not make sense.
Ackman then cited six factors that he believes would have to be negative or worrying if a 'true' recession was on the horizon. He stated that consumer spending is higher than last year, the unemployment rate is at a historic low, there are more job openings than job seekers, most businesses will deliver strong quarterly results if they have a strong ability to set prices and consumers have $2.5 trillion in excess savings that they are likely to spend.
He also believes that inflation is unlikely to come down in the short term as the current price increases are driven not because of a change in consumer demand but due to supply factors. The prices for housing, rentals, food, agricultural and energy products will remain high according to Ackman since their supply is outstripped by demand.
The responses to Ackman were mixed as several people disagreed with him. Most pointed out that his chosen definition for a recession was inaccurate, since the National Bureau of Economic Research (NBER), which is a private agency responsible for declaring a recession does not define a recession as a sequential GDP growth drop.
Others pointed out that if consumers continue to purchase the same amount of products and services irrespective of high prices, then the GDP will continue to grow despite inflation; and if they do not, then a recession will take place.
Ackman concluded by outlining that his hedge fund will always bet on the share prices of businesses with strong pricing power and strong fundamentals and that it will also profit when the Federal Reserve raises interest rates - a contentious point between policymakers across America.