The United States is in a recession if we use the conventional definition, even though it is not yet officially recognized. But there’s more to the tale, as there always is in the post-pandemic era. For many people, a recession is an economy showing broad signs of a slowdown for two consecutive quarters.
However, this assertion might be contested because the economy continues to show robust employment and expenditure from businesses and consumers. When a recession has set in, it is the non-profit National Bureau of Economic Research’s job to make the announcement.
Since economic data is hindsight, the NBER hasn’t rung the recession bell. Recessions are sometimes reported by the organization months after they have happened.Therefore, a brief recession may have already ended when it is formally recognized.
What Constitutes A Recession, According To The NBER?
The NBER is not yet ready to declare that the present economic growth is over, even though the economy has shown signs of weakness this year. Although GDP has fallen for two consecutive quarters, this is reasonable since hiring has been brisk among businesses.
However, the employment market starkly contrasts the NBER’s expected widespread decline in economic activity. And the downturn is often expected to extend more than a few months. However, the severity and breadth of that fall meant that the NBER had to be open-minded about how it defined things.
However, the NBER will want to verify that the drop’s depth, diffusion, and length meet its criteria before determining.
How Does The NBER Measure Downturns?
Given its need for leeway in making recession predictions, the NBER is intentionally obtuse about which specific economic indicators it considers.
Generally, it considers real personal income, fewer transfers (PILT), non-farm payroll jobs and real personal consumption spending. It also considers wholesale-retail sales adjusted for price fluctuations, employment as evaluated by the survey data, and industrial production, as stated on the site.
However, it does not give any one metric any special treatment. The National Bureau of Economic Research defines a recession as declining economic activity. It takes a mix of art and science to predict when and how that shift will occur.
Signs Of A Recession
The U.S. Dollar Currency
The U.S. dollar is a major reserve currency and a major player in international trade. U.S. interest rate hikes, which have been occurring regularly since March, have boosted the dollar’s allure among international investors.
The dollar is a popular choice since it is a haven in any economy. For example, a worldwide epidemic or conflict in Eastern Europe gives investors a greater incentive to buy dollars. These incentives are often in the type of U.S. government securities.
The Bank of England recently interfered in the financial markets to restore faith in U.K. assets. However, U.S. tourists enjoying a high dollar will find that it causes problems for almost everyone.
Many currencies have declined, including the British pound, the euro, the Chinese yuan, and the Japanese yen. This raises the cost of importing food and fuel for such countries.
These nations must protect their currencies from the pandemic inflation they are battling. Hence, central banks raise interest rates more quickly and at greater levels.
Many of the firms in the S&P 500 have international operations, so the strengthening of the dollar has a disruptive impact on Wall Street. Experts predict that the profits of the S&P 500 will decrease by 0.5% for every 1% increase in the dollar index.
The Economic Activity In The United States
Retail is the primary engine that powers the greatest economy in the world. Shoppers in the United States are exhausted, and price increases over a year have left customers wary, especially as pay growth has lagged behind inflation.
Economists stated that customers are drawing down their savings accounts due to the difficulties of inflation.
The Federal Reserve is to blame for the decline once again. Fed Chair Jerome Powell is willing to risk a recession by rapidly increasing interest rates in the fight against inflation.
Inflation is a major concern for Federal Reserve Chairman Jerome Powell. Therefore, the Fed is hiking interest rates rapidly, perhaps setting off a recession.
A mortgage’s monthly payment has reached its highest level in almost a decade. The interest rates have grown unprecedentedly, making it more difficult for firms to expand. Rising interest rates from the Federal Reserve may reduce prices over time. Meanwhile, consumers deal with a double whammy of rising costs, with both borrowing costs and the cost of basic commodities increasing.
As a result of Americans spending freely during the 2020 lockdowns, the economy recovered from a short but devastating pandemic recession. Since then, however, government help has dried up, and inflation has taken hold. This is driving up prices at the quickest pace in 40 years and eroding the purchasing power of households.
America’s Corporations Shift
Historically, high inflation cuts into earnings. However, businesses have expanded across sectors over most of the epidemic. They could pass on most of the price increases to customers, helping them maintain healthy profit margins.
However, this financial windfall may not endure. In September, investors were caught off guard by the performance of a corporation whose financial health is a proxy for the whole economy.
FedEx has operations in over 200 countries and issued a sudden revision to its projection. This signaled a decline in demand and predicted a more than 40 percent drop in profitability.
In an interview, the company’s chief executive was asked whether he thought the slowdown indicated an impending worldwide recession. He answered in the affirmative.
Since FedEx operates worldwide, it may serve as an indicator of economic health. The company’s updated forecast has reignited Wall Street’s recession worries.A barometer of the global economy, FedEx operates in every major region. Therefore, concerns of a recession have been revived on Wall Street due to the updated forecast.
The Latest On The Economic Recession: Key Figures
Consecutive quarterly economic contractions are quite concerning. While the updated statistic for the second quarter is better than the first estimate, it is unlikely to ease concerns among investors and consumers in the United States.
The chief financial strategist at Orion Advisor Solutions said it is still insufficient to alter the economy’s status quo.
Improving GDP figures may help lift spirits. In the third quarter, the Atlanta Federal Reserve’s GDPNow forecasts the economy would expand at an annual pace of 2.7% after adjusting for seasonal factors. Even if it’s not a very strong number, it will calm nerves about the state of the economy.
In August, industrial output fell as companies struggled in a challenging economy.
According to a study by Wells Fargo Securities, industrial output fell 0.2% in August due to a lack of impetus. Manufacturing managed a little 0.1% rise despite a 2.3% decline in utility and a flat rating for mining, but regional Fed polls indicate difficulties ahead for the industrial sector.
From now through the end of 2022, the high currency and the depressed housing markets and gross domestic product will continue to be significant obstacles to industrial output.
Indices Of Consumer Price Changes
While inflation has slowed from its July and June highs, it is still much over the target and severely damaging most Americans’ buying power. Due to the rapid rise in prices, the Federal Reserve has indicated that it is prepared to raise unemployment rates and slow the economy further to bring inflation under control.
The Fed’s preferred inflation indicator, the Core Private Consumption Expenditure Index (PCE), which excludes food and energy, paints a little more optimistic picture. Comparing prices from August a year ago to August 2018, core PCE indicated a price increase of 4.9%. That’s a lot higher than the Fed’s aim of 2%, by the way.
Statistics On The Labor Market
The U.S. job market is strong, despite general economic uncertainty and worries about a further recession in the coming months. The unemployment rate had decreased by two percentage points since last year and has now returned to where it was before the recession.
At the same time, payroll was increased by 315,000 in August and 537,000 in July before rising by another 263,000 in September. Practically speaking, everyone who is willing to work may gain employment.
The Federal Reserve’s goals are to maximize employment while maintaining price stability. Fed officials can concentrate on lowering inflation thanks to the robust labor market.
Even while the September employment data was in line with expectations, it was likely too robust to give policymakers much wiggle space, according to experts. The result is “expected to maintain the policy in tighter mode and to put pressure on risk assets.”
The Index Of Supply Management Activity In The Manufacturing Sector
The long-term trend of optimism in our poll of industrial company CEOs continued in August. As measured by this indicator, Executive optimism has been high (defined as a value over 50) for the last 28 months.
The ISM Buying Managers Index is based on responses from buying and supply executives at more than 400 U.S. manufacturing firms.
According to Institute for Supply Management Manufacturing business survey committee head Timothy R. Fiore, “The U.S. manufacturing sector continues to increase, although at the slowest pace since the pandemic recovery started.”
Weekly data on new unemployment insurance claims are available publicly, giving a snapshot of the employment market. Initial claims on the rise indicate that more individuals are leaving their jobs (and claiming unemployment).
Initial Applications For Jobless Claims
The current amount of new claims for unemployment insurance is encouraging. They were lower earlier in the year, but the Fed’s policy of gradual rate hikes has caused a little uptick. In March, around 170,000 people filed for unemployment benefits. As the Fed has been attempting to reduce inflation, a further hike would be reasonable.
Housing Market Statistics
Construction of new dwellings picked up in August, increasing at an annual pace of 12.9% after falling by almost 11% in July (when not corrected for seasonal factors). The need for multi-family dwellings was pushed forward by rising rental prices.
However, rising interest rates and home prices have dampened the housing market.
Survey Of Job Vacancies And Employee Turnover Data
The number of open positions is at a record high, notwithstanding the persistently low unemployment rate. In July 2019, there were almost 7 million job opportunities. Roach estimates that for every two available jobs, only one individual is looking for employment.
New data, however, suggests a relaxing of labor market tightness. Six months ago, there were over 2 million more job vacancies, indicating a slight decrease in demand for labor. Participants in the market keep a careful watch on the development even though the labor market is generally tight.
Moreover, the Fed may become less aggressive in its monetary policies if the employment situation worsens.
Readings Of The Data
Although the economy is not yet technically in a recession, the economic analysis does not look good. Keep in mind that not all of the ranked data points above would be given equal weight in determining whether or not the United States is experiencing a recession.
The job market seems to be stable. However, due to the weakening consumer demand, it may witness some instability shortly.
Due to historically low unemployment and a large number of available but unfilled positions, the labor market represents the economic sector with the greatest strength.
Meanwhile, it seems that consumers are handling rising inflation better now than in 2022; here’s hoping that trend continues over the next several months.
The housing and stock market, two economic sectors most vulnerable to increases in borrowing rates, have both performed poorly, according to the corporate earnings analysis.
Staying On The Safe Side
Put simply, until global inflation is controlled and the federal reserve removes its hold, there are few secure locations for capitalists to put their money. The results may be catastrophic when war, inflation, and extreme policies occur.
The United Kingdom is ground zero for the confluence of economic, financial, and political disasters.
Like the rest of the globe, the United Kingdom has had trouble keeping up with rising costs caused by the catastrophic Covid-19 shock and the subsequent interruptions to global commerce caused by Russia’s invasion of Ukraine. Energy prices have skyrocketed, and supplies have been running low since the West stopped buying Russian natural gas.
Recently, the newly elected administration of Prime Minister Liz Truss presented a comprehensive tax reduction proposal that experts on all sides of the political aisle have blasted as unorthodox at best and sinister at worst.
In brief, the Truss government promised to lower taxes for all Britons to boost consumer spending and business investment and, in principle, cushion the impact of a recession. However, there is insufficient revenue to cover the cost of the proposed tax cuts without increasing government debt.
The move caused widespread fear in financial markets and placed Downing Street at odds with the Bank of England, the country’s autonomous central bank. Investors around the globe dumped their U.K. bonds, sending the pound to its lowest level versus the dollar in over 230 years – since Congress officially recognized the dollar as lawful currency in 1792.
How Long Does A Recession Typically Last?
The NBER reports that the average duration of a recession ranges from two months to a few years. However, the current economic context’s specifics prevent us from comparing directly to the past.
Large unknowns include the duration of the pandemic’s aftereffects and its potential impact on inventories and supply chain operations. While the unemployment rate remains low, weekly reports of layoffs and company cost reduction are becoming more common. Another issue of worry is the conflict in Ukraine. Since it is hard to foresee economic cycles, it is prudent to save money in advance.
Preparing For A Downturn
A few options are available for coping with the present economic climate and being ready for the future. One of the main benefits of establishing or increasing one’s emergency fund is dealing with unexpected financial setbacks without resorting to debt.
It’s also a good idea to take a thorough look at your expenditures, make any necessary adjustments, and see your options for getting financial aid to cover your obligations. Also, investing in bonds with higher yields might mitigate inflationary pressure. Corporate lending is likewise at healthy levels ahead of a possible recession.
When Was The Last Recession?
The NBER says it was between Feb 2020 and April 2020.
As a result of certain state governments relaxing regulations and exceptional direct payments and workers’ compensation helping consumers make do, the economy was growing again by May 2020.
Previously, the Great Recession (December 2007–June 2009) was the last time the economy shrank. Although it wasn’t as bad as the Great Depression or the Covid Recession, that downturn lasted much longer.
From 1854 till now, the expansion between the Global Recession and the Covid Recession has been the most extended economic boom in the United States.
Who Determines When A Recession Begins?
The Business Cycle Dating Committee of the National Bureau of Economic Research defines a recession as a significant decline in economic activity that is widespread and lasts for more than a few months. This committee is responsible for formally declaring recessions.
When deciding whether or not a recession is occurring, the committee considers employment patterns. It also evaluates measures of income, labor, inflation-adjusted expenditure, retail sales, and manufacturing production. Jobs and an index of inflation-adjusted earnings that do not include social security and other government assistance have considerable weight.
But the NBER usually doesn’t announce a recession until months or even a year after it has started. Economists generally agree that an increase of half a percentage point in the unemployment rate over many months is the most accurate indicator of a downturn.
Do Two-Quarters Of Economic Contraction Mean A Recession?
That’s more of a rule of thumb than a formal definition. However, it has shown to be a helpful tool in the past. Economist Michael Strain from the conservative American Enterprise Institute has observed that every one of the last ten times, the GDP dropped for two quarters, and a downturn followed.
However, many economic experts still don’t believe we’re in a recession. This is due to the thriving employment sector, to name only one. Another factor is that American consumer spending has remained steady, although at a lower rate. Although people are spending less on big-ticket items like refrigerators and couches, they are spending more on experiences like vacations and eating out, suggesting that millions of people are branching out more.
Do Most People Expect A Recession Soon?
Yes, since many people are stressed out about their finances right now. Higher costs for necessities like petrol, food, and rent have reduced the purchasing power of Americans, while pay growth has lagged behind inflation.
Consumer spending, the primary engine of economic growth, has decreased. Walmart has stated that buyers have cut down on discretionary expenditures like new apparel due to increasing petrol and food expenses. Walmart, the biggest retailer in the United States, has lowered its profit forecast, and they said they have to further discount things like furnishings and electronics.
The typical 30-year fixed mortgage interest rate is now above 6%, up from around 3% a year ago, thanks largely to the Federal Reserve’s rate rises, making home buying more costly.
With rising rates, firms will be less inclined to spend money renovating or replacing their facilities or purchasing new machinery and tools. Organizations will restrict recruiting efforts and cut down on spending and investing. Companies are becoming more cautious about spending, which might lead to layoffs. Consumer spending would drop much lower if the economy lost employment and the people became more anxious.
A Recession May Be On The Horizon; What Are The Warning Signs?
Economists agree that a continuous increase in job losses and a jump in unemployment would be the most telling signs of a recession. Recessions have historically followed an average three-month rise in the underemployment rate of three-tenths of a percentage point.
The weekly increase or decrease in the number of persons applying for unemployment benefits is closely watched by many economists as an indicator of the severity of layoffs. Despite a labor shortage, layoffs have decreased to a four-month low, as shown by a decrease in the weekly number of applications for unemployment benefits.
What Other Warnings Signs For A Recession?
For another recession indication, many economists keep an eye on the interest costs, or yields, on various bonds. This happens when a shorter-term treasury yield, like the 3-month T-bill yield, is higher than the yield on a longer-term treasury, such as the 10-year Treasury. Normally, you wouldn’t see it. Most of the time, the return on investment (yield) for a bond increases the longer the bond’s duration.
If the yield curve is inverted, investors expect a recession, likely resulting in a rate cut from the Federal Reserve. An inverted curve is a sign of a recession, and a recession may not set in for another 18–24 months following a yield curve inversion.
However, many experts claim that the 3-month yield to 10-year yield comparison has a stronger track record of predicting recessions. Currently, such rates are not negative.
The Fundamentals Are Still Solid
While a recession is more likely, and negative real GDP expansion might occur this quarter, or in the coming quarters, the job market is still robust, and consumers are typically solid.
The construction of homes and the manufacturing of automobiles are both booming. Home prices have been stable and high, but supplies are low and may go much lower as mortgage rates rise. Due to a lack of semiconductors, vehicle manufacturing rates are lower than their all-time highs. Manufacturing activity may remain abnormally high throughout the recession as order backlogs persist after supply networks are unblocked.
The strong labor market continues to show healthy characteristics. The unemployment rate may be low, but the ratio of available jobs to those seeking work is at an all-time high. This indicates that corporations may postpone the impact on unemployment by reducing the number of available positions before laying off existing workers.
Consumers, businesses, and the financial sector have their strongest balance sheets in decades. In addition, the present demands surrounding energy infrastructure, automation, and national security, which are unrelated to the economic cycle or the activities of the Fed, look to be powerful accelerators for corporate capital investment.
Income for businesses may be more stable. Since more and more businesses are shifting toward subscription and fee-based income models, this trend may reflect in the makeup of modern stock indices.
To sum up, we have faith in the economy’s underlying strength. Ultimately, we expect it to serve as a cushion in the case of a downturn. However, equities might drop another 5%- 10% before reaching a bottom in the bear market. Patient investors think about utilizing tax-efficient rebalancing strategies like harvesting losses. Further, we urge you to seek the broadest possible spread of your investments among different types of assets.
How Will A Recession Affect You?
While it may be tempting to freak out at the mere mention of the word recession, you must keep your cool. Most of us will feel the pain of a recession, but we may still take steps to lessen its impact. As the economy sends conflicting signals, it might be a good idea to retrieve your money in the stock market and save it for emergencies.
It’s natural for individuals to worry about their financial situations during a recession. In the economic world, a recession is a downturn of significant magnitude.
Since businesses need to react to lower consumer spending, a recession might result in job loss or employment problems (no bonus, reduced remuneration, etc.). When there is less disposable income in the economy, fewer individuals are willing to spend it on frivolous purchases.
Unemployment is likely to rise dramatically in the worst-case scenario of a recession. The Fed’s interest rates dampen consumer spending, employment, and wage growth. This might lead to a full loss of revenue or a reduction in workplace bonuses. Even if this isn’t good news, we have to face facts.
Fortunately, a recession has not been declared for this economic cycle. Others fear a recession due to the economy’s lack of growth. The outcome of the war against inflation is anyone’s guess, so it’s best to be ready for the worst. Alternatively, you may seek the advice of a financial advisor to stay on the safe side.
Conclusion: Are We In A Recession?
Even if a recession were to occur, various economic indicators suggest it would be milder than in the past. There have been recent indications of improvement in supply-chain concerns in industrial production, particularly in the car industry. If a recession were to occur, these variables imply that its impact would be less than usual.
An array of factors that have historically resulted in a diverse set of market and economic results contribute to the fact that recessions and downturns are not the same. Distraction from the real issues of what is driving recession risk and what it may mean for the economy can occur if people focus on debating the definition of a recession.
The market’s pricing in future Fed rate rises has led to a sharp rise in short- and ultra-short-term credit rates. Moreover, choosing bonds with short or ultra-short tenure can tame the interest rate volatility.