Are We (Unofficially) In A Recession Now?

Key Takeaways

• Gross Domestic Product turned negative in the first half of 2022, but rebounded back to positive growth in the third quarter.
• The unemployment rate remains low, even as many businesses begin to lay off workers.
• Employee wages continue to rise, pointing to a recession that is not yet present.

Experts have been talking about a U.S. recession for close to a year now, but with no official announcement, the debate continues. Here is an update based on the most recent economic reports to help better understand where the economy currently sits and if a recession is still on the horizon.

Definition of a recession

A drop in output across all leading economic indicators defines a recession. More specifically, if employment levels drop, consumer spending decreases, and industries don’t produce as much as they did previously. These areas of economic activity have to be in a long-term decline for there to be an official call, a definitive recession.

Even though the final monthly and quarterly numbers of these activities are used to determine a recession, they’re not always representative of the state of the economy. The National Bureau of Economic Research (NBER) is the agency that calls a recession whenever it notes that economic indicators are showing continued signs of a slowdown.

In the past, the NBER would call a recession after two consecutive quarters of negative gross domestic product (GDP). What makes things different this time is that other economic indicators still showed strength during the same contraction period. This forced the NBER to reassess.

Finally, understand that the NBER says there is no hard and fast rule regarding the measures involved in its decision-making process. In other words, the NBER doesn’t rely solely on three reports or the same set of reports each time the economy weakens. It uses all the information from the following indicators and more to aid its decision-making process.

Gross Domestic Product

Gross Domestic Product had a poor showing in the first two quarters of 2022, with a contraction of -1.6% in the first quarter and -0.6% in the second quarter. Those losses were reversed in the third quarter of 2022 with an increase of 2.9%. The positive showing was driven by an increase in exports and consumer spending but offset by a drop in housing investment. The slowdown in housing construction took 1.4% off the GDP.

This measure is important because it gives us a broad picture of the economy’s overall growth. High GDP signals that the economy is growing quickly, and the Fed may step in to raise interest to slow it down, hoping to curb inflation. A low GDP signals a weak economy and could prompt the Fed to lower interest rates to help spur new growth.

Today the Fed is in a tough spot because the economy appears to be slowing, according to GDP reports, while inflation remains high.

Unemployment Rate

The unemployment rate in November 2022 held at 3.7%, staying within the narrow window of 3.5% to 3.7% it’s been in since March of this year. In fact, the economy added 263,000 (non-farm) payroll jobs in November, keeping the unemployment rate steady, even though many corporations are laying off large amounts of workers. The Federal Reserve may indirectly try to slow the rate of employment to cool off inflation and growth in GDP.

The unemployment rate is important because businesses lay off employees to save on labor costs and improve profitability. When they lay off workers or implement a hiring freeze, their ability to grow usually slows because they have fewer employees to do the work at hand, and there’s less money allocated towards growth activities such as innovation or improving existing products. Businesses become less productive and sell fewer products. In turn, slower business growth slows GDP growth because business output has decreased.

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Wage Growth

The most recent jobs report from the Bureau of Labor Statistics showed that average hourly earnings increased by 0.6% compared to the previous month. This came in at double what economists were estimating. Year-over-year, average hourly earnings have increased by 5.1%.

An increase in wage growth means more money is flowing into the economy. When consumers have more to spend, the economy grows. When there is a slowdown in wage growth, consumers simply have less on-hand to spend. When consumers can’t or won’t spend, industrial output slows because fewer people buy goods.

What is unique about the current environment is that while wages are increasing, they are doing so at a slower pace than the rate of inflation. This means that while people earn more money from their jobs, it doesn’t feel like it, because the prices they pay for goods are rising faster than their wages.

Recession: Not Yet

The current economic indicators of a recession have yet to appear. Economists and financial experts are still debating a pending recession, but it may not be as long or as dire as initially predicted. A recession is still expected by most analysts in 2023. Now we’re all left asking when, how long, and how bad will it be?

The adage of “this time it’s different” rings true in today’s environment. While there was a slowdown in GDP over two quarters, the unemployment rate remains low. This is true even as many industries have implemented a hiring freeze or are laying off workers, perhaps because a large number of those laid-off are finding employment again relatively quickly.

Work-from-home positions or hybrid office arrangements that result in less or no commuting costs effectively give a raise to the employee. Another facet of employment numbers is that millions of people left the working world during the pandemic and have yet to return to traditional employment. Other losses were due to the pandemic and many baby boomers reaching retirement age.

Another factor at play is the stimulus money people received during the pandemic. Not only were people receiving money, but rent and student loan payments were deferred, allowing many of us to save more money. During the pandemic months, the personal savings rate, which historically is in the single digits, hit close to 30%, or around $2.3 trillion. This means people are more likely to have money to help them deal with higher prices today, at least in the short term.

Bottom Line

Even though many economists are still predicting the US economy will enter a recession in 2023, there are some signs this might not happen. Fuel prices are falling, as are commodity prices. The costs of some daily necessities are slowly returning to their pre-inflationary price points, and the supply chain is returning to normal.

Consumers are spending despite predictions of a slow holiday season from retailers. We need to continue closely monitoring the latest economic reports to see when the economy will enter into a recession or if it can be averted. Q.ai takes the guesswork out of investing.

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