Is the US in a recession? Measuring the slowdown in the world’s largest economy

US economic data is sending mixed messages, making it difficult to answer a seemingly simple question: is the world’s biggest economy in recession?

Figures from the Commerce Department on Thursday showed a second straight quarter of falling gross domestic product, intensifying a debate that has become politically charged.

News of the second consecutive quarterly decline – a common marker of recession – followed signs that business activity across the country is starting to slow. The US housing market is teetering and consumers are increasingly pessimistic as the Federal Reserve steps up efforts to contain the highest inflation in more than four decades with huge interest rate hikes.

The official arbiters of whether or not the US is in recession – a group of economists at the National Agency for Economic Research (NBER) – have yet to give their formal judgment.
But White House policymakers did.

Ahead of Thursday’s report, Treasury Secretary Janet Yellen said she would be “surprised” if the NBER declared the current moment a recession. She reinforced that view at a press conference after the data was released, noting that the substantial job losses, business closures and tight budgets that typically accompany a recession “are not what we’re seeing right now.”

So did the Fed. Jay Powell, the central bank’s governor, warned on Wednesday that the GDP figures are revised several times and that the first iteration should be taken “with a hint of skepticism”.

However, Republicans seized Thursday’s data, immediately branding it the “Joe Biden Recession.”

Those who have embraced the idea that the US is in recession point to the fact that whenever there have been consecutive GDP contractions in the past, a recession has been declared by the NBER – most of the time.

“The ‘official’ definition of recession is not consecutive quarters of negative real GDP,” said David Rosenberg, chief economist and president of Rosenberg Research. “But every time this happened in the post-war period the economy was in recession.”

Most economists share the White House and Fed’s view that the US is not yet in recession, but their confidence that the economy can avoid such an outcome at a future date has declined sharply.

“Based on GDP data alone, we cannot conclude that we are in a recession right now,” said Blerina Uruçi, US economist at T Rowe Price. “This could be the prelude to a recession… and we need to be careful not to discount anything now because there’s a lot of uncertainty.”

The NBER characterizes a recession as a “significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.”

The agency’s committee of eight economists meets behind closed doors to make that decision, typically with a delay of several months or even a year. The judgment is based on measures that include monthly job growth, consumer spending on goods and services and industrial production.

By those standards, the current economic landscape unequivocally doesn’t hit that threshold, say Fed and White House officials.

Last month, 372,000 healthy jobs were created, and the unemployment rate stabilized at a historically low level of 3.6%. For every unemployed person, there are approximately two vacancies, making this one of the tightest job markets in recent history.

“We’ve never had a recession without layoffs, [e] I don’t think we’re close to a full cycle of layoffs. There’s just no evidence of it,” said Aneta Markowska, chief financial economist at Jefferies.

Economists point to Sahm’s Rule. Developed by former Fed official Claudia Sahm, the rule stipulates that a recession sets in when the three-month moving average of the unemployment rate rises at least half a percentage point above its 12-month low. By this metric, the unemployment rate would need to have exceeded 4% to say the US is in recession.

The GDP data, however, included signs of weakness in addition to the key figure, which suggests much less buoyant consumer and declining investment. Economists at Citigroup have even said that mid-2022 could mark a peak in activity.

“This is a pretty broad downturn in spending,” added Jonathan Millar, a former Fed economist now at Barclays. While he rejected the idea that the US economy would soon enter recession, he said there is a “very strong possibility” that it will happen next year and that “it really depends on how resilient the services sector is”.

The US central bank is expected to press ahead with its plans to tighten monetary policy even as the economy slows, having raised interest rates by another 0.75 percentage point this week for the second consecutive meeting. Powell has signaled further increases, and market participants expect the benchmark interest rate to rise to around 3.5% by the end of the year, one percentage point above today’s level.

The Fed chairman said rate hikes could reduce inflation without causing painful job losses or a sharp drop, but admitted again this week that the path to achieving that outcome “has clearly narrowed … and could narrow even further.” “.

He also said the central bank remained strictly focused on curbing high inflation and that failing to do so would be a worse outcome than excessively restricting the economy — heightening concerns about an eventual recession.

“This is what happens in an environment where the Fed tries to make its policy restrictive,” said Andrew Patterson, senior international economist at Vanguard. “We will start to see changes for the worse in production and eventual increases in unemployment, in an effort to try to reduce inflation.”