So are we in a recession, or not?
If you are confused as to whether the US economy is in recession, you are not alone.
On the one hand, GDP, a key measure of economic output, shrank for a second straight quarter this week, raising fears that the country has entered – or will soon enter – recessionary territory. On the other hand, the job market remains very strong, telling us the economy is still strong.
Some economists refer to two consecutive quarters of contraction as a technical recession. And with good reason: 10 of the last 10 times the US economy shrank in two consecutive quarters, the US economy was declared in recession. But massive job losses occurred during seven of the last seven recessions, and that is no longer happening.
There is no firm rule defining a recession in the United States. Instead the official designation is determined by eight economists who work together on the Business Cycle Dating Committee. The group works under the umbrella of the National Bureau of Economic Research (NBER), a private non-profit organization. It has not yet used the “bearish” label.
They follow a relatively vague definition that allows for wiggle room: a recession, they write, “involves a significant drop in economic activity that extends across the economy and lasts more than a few months.”
So are we really in recession? it’s hard to say. But here’s why we might be. And why can’t we?
Inventories – So are we in a recession, or not?
Trade inventory problems play a significant role in economy swings, and a large part of the economic contraction we saw last quarter came from companies slowing the expansion of those inventories. Last year, businesses stockpiled goods to get ahead of supply chain woes and in anticipation of post-Covid consumer demand, but may now overstock.
GDP contracted at an annualized rate of 0.9% in the second quarter, but a slowdown in inventory accumulation led to a massive 2 percentage point reduction in output. This means the economy would grow if companies were not reducing their reserves. It also signals that consumer demand may be weakening, another sign of a slowdown.
Jobs – So are we in a recession, or not?
The labor market remains a source of strength to the economy and a shining beacon of hope among those who believe the United States can survive a recession.
As of June, 98% of the jobs lost during the pandemic had been recovered. Unemployment remains at its all-time low in 2022, and the US economy has added 2.2 million jobs since January – almost the fastest growth on record.
In May, there were about two open positions for every job seeker, as well as a historically low level of layoffs. The economy is creating about 400,000 jobs every month, and salaries were also rising in June. It doesn’t look like a normal recession.
Inflation & rate hikes – So are we in a recession, or not?
Inflation is at historic highs in the United States, and it is eating away at consumer spending power.
US consumer prices hit a new pandemic-era peak in June, jumping 9.1% year-on-year, according to the most recent data from the Bureau of Labor Statistics. This is higher than the previous reading, when prices were up 8.6% for the year ending in May.
Accordingly, many American households are strapped for money: New data from the Bureau of Economic Analysis shows that Americans are saving far less than they were a year ago. In May, Americans saved just 5.4% of disposable personal income, down from 12.4% year-on-year.
To counter white-hot inflation, the Federal Reserve has approved a series of supersized interest rate hikes this year. Higher rates keep prices under control by slowing down the economy. But the Fed is walking a narrow line. The Fed raised rates 11 times, the Fed has only successfully avoided a recession three times. During each of those cycles, inflation was lower than it is today. This has made some analysts and market participants nervous about a possible slowdown.