Last week the Bureau of Economic Activity reported Gross Domestic Product fell 0.9% in the second quarter. Naturally, many people began to wonder if the US had entered a recessionary period. A recession is a significant, widespread, and prolonged downturn in economic activity. Because recessions often last six months or more, one popular rule of thumb is that two consecutive quarters of decline in a country's Gross Domestic Product (GDP) constitute a recession.
GDP in the first quarter of 2022 was down 1.6%, followed by a 0.9% decrease in the second quarter. By the “thumbnail” definition the US is in recession. However, the terms “significant” and “widespread” deserve a little more attention. During a recession we normally see dramatic increases in unemployment, coupled with decreases in wages, consumer spending and industrial production.
The National Bureau of Economic Research (NBER), a non-profit, non-governmental agency is responsible for tracking business cycles from peak to trough. They define a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Generally speaking, the belief is the NBER looks at several factors to determine a recession not simply negative GDP. The NBER is thought to use several different factors including:
• real personal income,
• non-farm payrolls,
• employment levels throughout the US,
• real personal consumption spending,
• seasonally adjusted sales figures and
• industrial production.
Using this broad base of data makes it clear the definition of recession is more difficult than two negative quarters of GDP growth. Currently US unemployment is at pre-pandemic lows at 3.6% in June (though the labor participation rate is slightly lower)1. The number of help wanted positions to people actively looking for work is 2:1, indicating a very strong labor market. We are also seeing increases in wages offered to entice people back to work. Spending, especially on the retail side, continues to be robust with 1% increase month to month and a 7.7% increase from the same period a year ago (ending June 30). Industrial production is only now beginning to slow from 104.6 in May to 104.4 in June and unemployment ticked up a bit last week.
Given the state of the various economic indicators it is unlikely the US economy is currently in recession. However, most economists and market participants believe a recession in some shape or form is on the way. The main driver for this belief is the Federal Reserve Board’s seemingly laser focus on combatting inflation. The Fed has already raised the benchmark interest rate to a range of 2.25% - 2.5% this year. There are three more FOMC meetings this year, with the likelihood of two more rate increases of 0.50% in both the September and November meetings with one more bite at the apple in December.
With an aggressive approach to inflation, it is likely the economy dips into recession later this year or near the beginning of next. However, based on current economic factors and underlying strength of the economy it is somewhat likely a recession in 2023 will be mild and short with recovery beginning towards the back half of the year. Of course, crystal balls tend to be hazy and other exogenous factors can benefit or harm any estimation of future economic growth.
1 The Labor Participation Rate is an estimate of an economy’s active workforce. If the rate is falling that means fewer people in the economy are seeking work and could be a indicator of a weakening labor market.