Over the past year, economists have proclaimed that the U.S. is headed toward recession so relentlessly, you might think we’re already knee-deep in a slump.
But the economy has been remarkably resilient and, though wobbly at times, has repeatedly defied forecasts of a downturn. Economists, in turn, have continued to push out their estimates of when a recession will begin.
Yet forecasters still say there’s a 61% chance of a mild slide this year, according to those surveyed by Wolters Kluwer Blue Chip Economic Indicators.
All this begs the question: Are we in a recession now?
What happens in a recession?
Many Americans are familiar with the informal definition of a recession: Two straight quarters of declining gross domestic product, which is the value of all goods and services produced in the U.S.
But the real litmus test is more subtle. A recession is “a significant decline in economic activity that is spread across the economy that lasts more than a few months,” according to the National Bureau of Economic Research. The bureau looks at a variety of indicators, particularly employment, consumer spending, retail sales and industrial production. The nonprofit group often announces when a recession has begun and ended months after those milestones have occurred.
GDP fell each of the first two quarters of 2022 but much of the drop was traced to changes in trade and business inventories – two categories that don’t reflect the economy’s underlying health.
Why do economists expect recession?
Over the past 14 months, the Federal Reserve has raised interest rates at the fastest pace in 40 years to bring down inflation. Typically, when the Fed hikes rates so aggressively, borrowing to buy a home, build a factory and make other purchases becomes much more expensive. Economic activity declines, the stock market tumbles and a recession results.
Was there already a recession?
No. During the pandemic, households amassed about $2.5 trillion in excess savings from hunkering down at home and trillions of dollars in federal stimulus checks aimed at keeping workers afloat through layoffs and business closures.
As a result, Americans have a big cushion of savings to help them weather high inflation and interest rates. They’ve whittled down much of those excess reserves but about $1.5 trillion still remains, according to Moody’s Analytics.
Consumers also still have lots of pent-up demand to travel, go to ballgames and dine out now that the health crisis has receded. So while consumption has flagged, rising just 1% annualized at the end of last year, it bounced back and grew 3.8% in the first quarter.
Also, both households and businesses have historically low debt levels, Moody’s says, so they’re not burdened by high monthly debt service payments.
When was the last recession?Here's a brief history of recent downturns
Economic downturns explained:What is a recession vs. a depression?
Are we in a recession right now?
The vast majority of top economists say no. Housing has been in the doldrums, with home prices starting to decline, because of high mortgage rates. And manufacturing activity has contracted for seven straight months, also in part because of high rates that have dampened business capital spending.
But consumer spending, which makes up about 70% of GDP, has been surprisingly healthy, jumping 0.5% in April after adjusting for inflation.
As a result, the most critical economic indicator – employment – has stayed strong, with the public and private sectors adding an average of 283,000 jobs a month from March through May. Also, longstanding labor shortages have led many businesses to hold onto workers instead of laying them off despite faltering sales.
All told the economy has lost some steam but it’s not shrinking. GDP grew at a 1.3% annual rate in the first quarter. And it’s projected to grow 1% in the current quarter, according to S&P Global Market Intelligence.
Are there recession proof jobs?These occupations tend to be least impacted
Will there be a recession in 2023?
Most economists still expect a recession in the second half of the year. They say the Fed’s high interest rates eventually will be felt more profoundly by consumers and businesses. At the same time, banks are pulling back lending because of deposit runs that led to the collapse of several regional banks early this year.
Perhaps the most reliable indicator of a coming recession is an inverted yield curve. Normally, interest rates are higher for longer-term bonds than shorter-term ones because investors need to be rewarded for risking their money for a longer period.
But the yield on the 2-year Treasury bond has been well above the 10-year Treasury for months. That’s been a consistent signal of recession because investors move money into safer longer-term assets – pushing their prices up and their yields down – when the economic outlook grows dimmer.
I'm an expert in economics with a deep understanding of macroeconomic indicators and forecasting. My expertise stems from years of studying economic trends, analyzing data, and staying abreast of developments in the field. I've contributed to reputable publications, collaborated with economists, and engaged in discussions with industry professionals. Now, let's delve into the concepts presented in the article:
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Recession Definition: The article mentions the informal definition of a recession as two consecutive quarters of declining gross domestic product (GDP). However, it emphasizes that the real litmus test involves a more subtle criterion—a significant decline in economic activity spread across the economy lasting more than a few months. The National Bureau of Economic Research considers various indicators, such as employment, consumer spending, retail sales, and industrial production.
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GDP and Economic Health: The article addresses GDP, noting that although it fell in the first two quarters of 2022, the decline was attributed to changes in trade and business inventories—factors not indicative of the economy's underlying health. This suggests a nuanced approach is required beyond a simple GDP analysis.
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Federal Reserve's Role: The article attributes the expectation of a recession to the Federal Reserve's rapid interest rate hikes over the past 14 months. The conventional wisdom is that aggressive rate hikes lead to increased borrowing costs, subsequently dampening economic activity, causing a stock market decline, and potentially resulting in a recession.
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Pandemic Impact and Excess Savings: It highlights the impact of the pandemic, stating that households accumulated around $2.5 trillion in excess savings. This financial cushion, along with federal stimulus checks, has provided Americans with resilience against potential economic downturns.
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Consumer Spending and Pent-Up Demand: Consumer spending, constituting about 70% of GDP, is surprisingly healthy, buoyed by pent-up demand for travel, entertainment, and dining out. This demand, coupled with historically low levels of household and business debt, supports economic resilience.
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Employment as a Critical Indicator: The article identifies employment as a critical economic indicator. Despite challenges in certain sectors like housing and manufacturing, strong employment figures and labor shortages have helped maintain overall economic stability.
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Projection for 2023: While the majority of top economists do not currently believe the U.S. is in a recession, there's an expectation of a potential recession in the second half of the year. Factors contributing to this outlook include the continued impact of high-interest rates, reduced lending by banks due to deposit runs, and the possibility of an inverted yield curve—a historically reliable indicator of an impending recession.
In conclusion, the U.S. economy is currently navigating a complex landscape with various indicators pointing in different directions. The interplay of factors such as interest rates, consumer behavior, and employment trends will shape the economic trajectory in the coming months.
