Is recession coming or not? Here’s what to look for
There’s an old saying that a watched pot never boils, and that description seems to apply to recession risks right now.
Americans have been awaiting, and fearing, an economic downturn all year, and yet a prolonged slump still hasn’t arrived. It now seems highly unlikely that a recession will materialize before 2023, and maybe not even then.
Part of the problem: A lot of us are watching the wrong pots heat up.
Each time a negative economic report comes out, it fans the flames of recessionary worry, but a lot of those indicators and releases don’t factor directly into the recession/expansion calculations.
The National Bureau of Economic Research, a nongovernmental group composed largely of university economists, is the organization that determines when recessions arrive and how long they endure. Here’s what they focus on and what they largely ignore:
What’s out
The backdrop for all of the economic angst of late has been the spike in inflation this year and Federal Reserve efforts to quash it by raising interest rates aggressively. Inflation has been trending slightly lower since midsummer, but the fight isn’t over, with at least a couple more rate hikes probable for at least a few more months.
But inflation and interest rates aren’t factors that the NBER economists focus on, at least directly. Interest rates are tracked in other economic gauges, such as the index of leading economic indicators, and they certainly matter.
One rule-of-thumb gauge, known as the inverted yield curve, is flashing recessionary warning signals right now. Normally, long-term interest rates are higher than short-term rates, and when this relationship reverses, it’s seen as a cause for alarm, for various reasons.
Recently, six-month Treasury bills yielded about 4.7%, compared with 3.8% for 30-year Treasury bonds, an abnormally wide and potentially alarming pattern. The inverted yield curve has a good historic track record of coinciding with recessions, and some economists are predicting a recession based on this measure. But it’s not a factor directly examined by the NBER.
So, too, for asset prices — from stocks and housing to cryptocurrency — all of which have weakened this year. But they’re not directly tracked by the NBER on its recession watch, either. The stock market in particular often tumbles on recession fears, but these downturns aren’t always followed by economic slumps.
What’s in
The NBER says its economists focus on six measures that can be simplified as follows: personal income less transfers, personal consumption/spending, retail/wholesale sales and industrial production, plus two measures of national employment/unemployment.
“There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions,” the bureau explained on its website. However, “in recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment,” it said.
The bureau often makes recession determinations many months after a downturn started, and it is cautious in its calls. The NBER economists are looking for signs of a “significant decline in economic activity that is spread across the economy and lasts more than a few months.”
That isn’t the case currently. Over the past six months through September, five of the six measures have shown gains (with wholesale/retail sales the exception), reports J.P. Morgan Asset Management, which tracks the indicators monthly. None of the six has shown much change, up or down, over that stretch.
The economy is like a giant oil tanker that usually takes a lot of time to change course, and it’s still moving forward. Notably, the NBER points out that “expansions are the normal state of the economy” and that “most recessions are brief.”
Where we stand now
All of this doesn’t mean boom times are at hand. Millions of Americans are feeling economic pain. Income inequality has been widening, for example, and there are fresh signs that many people are running up credit card balances and having trouble paying off debts. And the Fed continues to tighten the screws.
Yet jobs remain plentiful, which is perhaps the key litmus test of recessions.
Economic downturns usually coincide with periods of mass layoffs that swell the ranks of the unemployed. Think back to peak recessionary jobless rates of 10% in 2009 or 14.7% in 2020, for example.
Layoffs have started to rise lately, notably in parts of the technology sector, but they’re hardly widespread. The U.S. jobless rate, which stood at 3.7% in the latest reading as of October, is actually slightly below where it started the year, despite Fed efforts to push it higher.
Nor have consumers turned off the cash spigots. The holiday shopping season is off to a robust start, with the National Retail Federation estimating a record 197 million Americans made purchases online or in stores over the long Thanksgiving weekend. The group forecasts a 6% to 8% holiday spending increase this November and December compared with the same stretch in 2021.
What got me thinking about all this was an announcement Nov. 28 by S&P Global that its economists are predicting a recession in 2023 with an economic decline — drumroll, please — of 0.1%.
All of which begs the question of whether a drop of one-tenth of 1 percentage point is really a downturn or just a rounding error. Or whether most Americans would even notice a decline of such a small magnitude.
You can make your own call on that one, or let the NBER economists do it.