Are we in a Recession?

This is who decides ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

July 13, 2022

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Good morning.

Under a new subscription plan rolled out in several markets, BMW owners will have to pay $18 a month to turn on the heated seats that are already equipped in their vehicles. Other products are also being moved to a subscription service — it's $12 per month to use the heated steering wheel, $42 a month for adaptive cruise control, and connecting an iPhone to a car using Apple's CarPlay feature will come with a $265 installation fee.

In other words, you can get the full experience of a Spirit Airlines flight for only the cost of a BMW.

Morning Brief

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A US recession technically doesn't happen unless eighth people decide it did.

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Peloton is outsourcing manufacturing in an effort to right its troubled financial ship.

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Croatia joins the eurozone.

US Economy

A US Recession Can't Officially Happen Unless Eight People Say So

Two consecutive quarters of negative gross domestic product readings. That's how most countries, and basically everyone on Wall Street, defines a recession. But not, would you believe, the US government.

A Bloomberg report on Tuesday was smart to point out that, technically, the world's largest economy defers the job of declaring a recession to an obscure cloister of eight elite economists. One former member called them "Ivory Tower eggheads." Here's how they work.

Punch Above Their Eight

It all started in 1978. That's when Martin Feldstein, then the head of the Cambridge, Massachusetts-based nonprofit the National Bureau of Economic Research, established the organization's eight-member Business Cycle Dating Committee.

The US deferred the judgment of what is and isn't a recession to this non-partisan group, currently led by Stanford economist Robert Hall. They don't hold scheduled meetings, meet in secret when they do meet, and sometimes only communicate by email. They also believe the two-quarter GDP standard is, well, bunk. So, what makes a recession?

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Rather than negative GDP readings, the NBER committee looks for "a significant decline in economic activity that is spread across the economy and that lasts more than a few months." That includes data on nonfarm payrolls, personal consumption spending, and industrial production — sometimes they take up to a year to declare a recession happened, well after Wall Street is over and done with it, and on to celebrating or panicking over the next big thing.

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US GDP contracted in the first quarter, and is expected to have done so again in the second quarter (data is slated for release on July 28). But what drove the group to declare a recession in 2020 was a steep decline in output and 22 million jobs losses — with the labor market as strong as it's been in decades, the US may not technically recognize a recession, even if you're soon likely to see flashing cable news chyrons that say otherwise.

Take it From an Expert: "The committee's current methodology is sound," said Anna Wong, Bloomberg Economics' chief US economist. "Q1's contraction is mainly due to strong imports (due to strong demand) after slowdown inventory building due to combination of supply bottlenecks and gangbuster inventory building in Q4 last year. It's hard to interpret that as a weakness-driven contraction."

Fitness

Treadmill and Bike Maker Peloton Will Stop Making Treadmills and Bikes in House

It may not be physically possible to do a U-turn on a stationary bike, but Peloton found a way how.

The troubled fitness equipment manufacturer announced Tuesday that it won't build bikes and treadmills anymore, outsourcing the task to one of its leading suppliers. It's a startling reversal that comes less than a year after Peloton broke ground on a since-canceled $400 million manufacturing plant in Ohio.

Spinning Their Wheels

Peloton traditionally divided manufacturing between partner suppliers and its own facilities, which notably included a Taiwanese facility it acquired for $45 million in 2019. But traditions have gone out the window this year — co-founder John Foley stepped down under activist pressure in February, Peloton laid off 3,000 employees, and a 24% sales dip to $964 million in the latest quarter cemented the first year-over-year revenue decline since the company went public in 2019.

Peloton's new CEO Barry McCarthy previously laid out strategies to turn around the company's business and reduce dependency on hardware revenue, which went stale after gyms reopened. Much of those plans involve doubling down on the company's software and marketing its exercise app independent of equipment. Meanwhile, the decision to out-sourcing manufacturing could help stabilize cash problems:

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After announcing a $757 million quarterly loss in May, Peloton had just $879 million in unrestricted cash and cash equivalents, which McCarthy admitted left it "thinly capitalized." The company has since raised $750 million in new debt and plans to cut $800 million from annual costs by 2024 — handing the bulk of production to Taiwanese manufacturer Rexon Industrial will help.

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"We are going back to nothing but partnered manufacturing," chief supply chain officer Andrew Rendich told Bloomberg. "It allows us to ramp up and ramp down based on capacity and demand." That's a valid point: Peloton's inventories, consisting almost entirely of finished products sitting in warehouses, grew to $1.4 billion on the company's balance sheet in the latest quarter, up from $937 million a year earlier.

Fortune Untold: According to a Financial Times report last year, in October 2020 Foley told a client event hosted by Goldman Sachs that Peloton would become "one of the few $1 trillion companies." Today, its stock is less than $9 a share and its $3 billion equity valuation pales in comparison to a near $50 billion peak in 2020. Hopefully they've hit peak resistance.

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Global Economy

Eurozone to Admit First New Member in Seven Years

(Five euro notes; Photo by Images of Money)

Europe's hottest club is also one of its most exclusive. And, for the first time since 2015, it's about to admit a new member.

On Tuesday, European Union finance ministers formally voted to approve Croatia's entrance into the eurozone. The maritime country, situated at the crossroads of Central and Southeast Europe on the Adriatic Sea, will become the currency's 20th member at the start of next year.

Eur' Invited

In 30 years, Croatia has gone from war to tourism hotspot, and gained European Union membership in 2013 following a series of governance reforms. But one headache remained for backpacking travelers: exchanging euros (used in 19 of 27 EU nations) for the Croatian kuna.

That headache is finally coming to an end, after what EU Economy Commissioner Paulo Gentiloni hailed as an "amazing journey." It took a few major steps, and comes with some great benefits:

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First, Croatia had to set an exchange rate of one euro to 7.53 kuno. The country also had to meet certain criteria like maintaining sound public finances and moderating long-term interest rates in-line with EU benchmarks.

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The transition will officially occur on January 1 of next year, giving the country months to prepare before gaining access to the stability and perks of a well-integrated economy with the rest of the currency's user countries.

"Adopting the euro is not a race, but a responsible political decision," said Zbynek Stanjura, finance minister of the Czech Republic, which currently holds the six-month rotating title of European Union presidency. Lithuania and Latvia were the last two countries to join the club, in 2015 and 2014 respectively.

Dollar Dip: Croatia's admission comes at a strange time for the eurozone. On Tuesday, the euro and the US dollar reached parity for the first time in two decades. The value of the euro has fallen 12% since the start of the year, as the war in Ukraine sends the continent into an energy and inflation crisis — with many analysts saying a so-called hard landing is all but inevitable for the alliance's economy. American travelers may reap some temporary rewards, but it could spell trouble for global economic stability.

Extra Upside

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London's Heathrow Airport is so overwhelmed it's enforcing a cap on daily passengers.

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NASA revealed a series of incredible images from the James Webb Space Telescope, the most powerful space observatory in history.

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