Explainer: How do we know when the recession started?

Washington (AFP) – By one common definition, the US economy is on the cusp of a recession. However, this definition is not what matters.

On Thursday, when the government estimates gross domestic product for the April-June period, some economists think it may show that the economy contracted for the second consecutive quarter. This would satisfy a long-running assumption when the recession begins.

But economists say that doesn’t mean the recession has begun. During those same six months in which the economy may have contracted, companies and other employers added a whopping 2.7 million jobs More than was achieved in most years prior to the epidemic. Wages are also rising at a healthy pace, and many employers are still struggling to attract and retain enough workers.

The strength of the labor market is a major reason why we expect the Federal Reserve to announce another big increase at the short-term interest rate on Wednesday, one day before the GDP report. Several Federal Reserve officials They cited healthy job growth as evidence that the economy should be able to sustain higher rates and avoid deflation. However, many economists are skeptical of this assertion.

The Fed is also trying to combat hyperinflation, which reached an annual rate of 9.1% in June, which is the worst sign in nearly 41 years. Rapid increases in prices, especially for necessities like food, gas, and rent, have eroded Americans’ incomes and led to more gloomy views of the economy. among consumers.

The most widely accepted definition of a recession is that of the kindly named National Bureau of Economic Research, a nonprofit group of economists who Business cycle dating commission A recession is defined as “a significant decline in economic activity that spreads through the economy and lasts more than a few months.” The committee evaluates a wide range of factors before publicly declaring the death of an economic expansion and the birth of a recession—and often it does so well after the event.

So if we’re not in a recession, what’s going on with the economy, which is sending frustratingly mixed signals? Here are some answers to these and other questions:

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Is the economy shrinking – or not?

It happened in the first three months of the year, when GDP shrank 1.6% at an annual rate. Economists predicted that on Thursday, the government will estimate that the economy managed to grow at an annual rate of just under 1% in the April-June quarter, according to data provider FactSet. If these forecasts are accurate, they indicate that the economy is not technically in a recession by any definition.

Even if growth is negative for the second consecutive quarter, Federal Reserve officials and Biden administration economists It refers to a lesser known measure called “Gross Domestic Income”.

Gross Domestic Product calculates the value of a country’s output of goods and services by adding up spending by consumers, businesses, and governments. By contrast, GDI, as the name implies, seeks to measure the same by valuation of income.

Over time, the two actions should follow each other. But they often diverge in the short term. In the first quarter, GDI grew by 1.8% – much better than the 1.6% decline in GDP.

As part of its judgment on whether the economy is in a recession, NBER considers the average of the two metrics. In the first quarter, the average was 0.2%, indicating that the economy expanded slightly.

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What else does the NBER device do?

NBER studies several other data points in determining recessions, including measures of income, employment, inflation-adjusted spending, retail sales and factory production. It gives more weight to jobs and a measure of inflation-adjusted income that excludes government support payments such as Social Security.

This measure covers the combined income of all workers, so it rises when the unemployed finds a job or when existing workers receive a wage increase. The measure increased slightly in April and May after a flat reading in the first quarter of this year.

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But don’t many people think a recession is coming?

Yes, because many people are now feeling a greater financial burden.

With post-inflation wages rising for most people, rising prices for necessities like gas, food, and rent have eroded Americans’ purchasing power,

On Monday, Walmart reported rising gas and food costs It forced shoppers to reduce their purchases of discretionary spending such as new clothes, a clear sign of weak consumer spending, the main driver of the economy. Walmart, the nation’s largest retailer, lowered its profit forecast and said it would have to discount more items such as furniture and electronics.

The Fed’s rate hikes have caused average mortgage rates to double from a year ago, to 5.5%, causing a sharp decline in home sales and construction.

Higher rates are also likely to affect companies’ willingness to invest in new buildings, machinery, and other equipment. If companies reduce spending and investment, they will also begin to slow hiring. Increased caution among companies about spending freely may eventually lead to layoffs. If the economy loses jobs and public fear increases, consumers will reduce their spending even more.

Goldman Sachs economists said rapid rate increases by the Federal Reserve raised the probability of a recession in the next two years to nearly 50%. Economists at Bank of America now expect a “moderate” recession later this year.

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What are some signs of an impending recession?

Economists say the clearest sign of a recession is the steady rise in job losses and rising unemployment. In the past, an increase in the unemployment rate of three-tenths of a percentage point, on average over the past three months, meant a recession would soon follow.

Many economists monitor the number of people seeking unemployment benefits each week, which indicates whether layoffs are getting worse. Last week, jobless claims rose to 251,000, the highest level in eight months. While this is a potential sign of concern, this is still a historically low level.

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Any other signs to watch for?

Many economists also monitor changes in interest payments, or yields, on various bonds for a stagnation signal known as the “inverted yield curve.” This occurs when the yield on 10-year Treasuries falls below the yield on short-term Treasuries, such as 3-month Treasuries. This is unusual. Long-term bonds usually pay investors a richer return in exchange for their money being tied up for a longer period.

Inverted yield curves generally mean that investors expect a recession that will force the Fed to cut interest rates. Inverted curves often precede recessions. However, it may take 18 to 24 months for the deflation to occur after the yield curve inversion.

Over the past two weeks, the yield on two-year Treasuries has exceeded the 10-year yield, indicating that markets are expecting a recession soon. Many analysts, though, say that comparing 3-month returns to 10-years has a better record of predicting a recession. These rates are not now reversed.

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Will the Fed keep prices high even as the economy slows?

Blinking signals for the economy – slowing growth with strong employment – put the Fed in a tough spot. Jerome Powell aims for a “soft landing,” in which the economy weakens enough to slow employment and wage growth without causing a recession and bringing inflation back to the Fed’s 2% target.

But Powell acknowledged that achieving such an outcome is becoming more difficult. Russia’s invasion of Ukraine and China’s COVID-19 shutdown have driven up prices for energy food and many parts manufactured in the United States.

Powell also noted that if necessary, the Fed will continue to raise interest rates even in a weak economy if that is what is needed to tame inflation.

“Is there a danger that we will go away?” asked Powell last month. Certainly there is a risk, but I do not agree that this is the biggest risk to the economy. The biggest mistake we could make… would be to fail to restore price stability.”