A growing number of economists predict that the United States is heading for a recession next year. Surveys have found that some Americans believe we are already in one. But regardless of the faint forecasts and the bitter mood among Americans, it could be a while before we really know if the country has fallen into recession and when.
“By the time a recession is officially called, we will be well into or almost out,” said Josh Bivens, research director at the Institute for Left-wing Economic Policy.
Recessions in the U.S. are officially declared by a committee of eight economists from the National Bureau of Economic Research (NBER). There is no difficult timetable for determining recessions, but it is often a year before the committee makes an announcement. (There are some common general rules, such as two-quarters of negative gross domestic product, but these are not hard and fast rules, and even these metrics are retrospective).
Fears of a recession have risen as the Federal Reserve raises interest rates to cool consumer demand and control the fastest pace of inflation in four decades. According to some measures, prices have risen more than 8 percent from a year ago, making it difficult for Americans to pay for food at the grocery store and gas at the pump.
Many economists agree that the country is not yet in recession, although there are some worrying signs.
By many measures, the economy still seems quite resilient. The job market has added hundreds of thousands of jobs each month and job offers have fallen slightly, but with 11.3 million, they still remain well above pre-pandemic levels. Wage growth continues to rise in certain sectors and new unemployment demands are low. The unemployment rate stands at 3.6 percent, slightly above its pre-pandemic level, which was at its 50-year low.
“It’s remarkably low,” said Wendy Edelberg, director of the Brookings Institution’s Hamilton project, about the unemployment rate. “I would have to move a lot to start worrying a lot about the job market.”
Fed officials hope they can achieve a “soft landing”: weaken demand and reduce inflation without causing chaos in the labor market. But it could be a difficult balancing act, as a slowdown in demand often leads to rising unemployment as consumer spending declines and companies reduce production and hiring, said Tara Sinclair, a professor of Economics at George Washington University.
To add to the challenge, the Fed doesn’t have a big soft landing history when inflation is as high as it is now, and consumer sentiment has continued to fall to historic lows. If consumers worsen with the economy and think they could lose their jobs, they could sharply cut spending, which would hurt economic growth.
So how do we know if a recession has come before the NBER makes a formal announcement?
An unofficial definition of recession is two consecutive quarters of declining gross domestic product, meaning the economy is shrinking rather than growing. The economy contracted in the first quarter of 2022 after a period of strong growth in the last quarter of 2021.
But even if this month’s next GDP report shows a fall in the second quarter, many economists may not see it as a recession because the labor market remains strong. And while most of the recessions the NBER has identified meet this benchmark, some do not: in 2001, for example, GDP declined in the first quarter, grew the next, and then fell again in the first quarter. third quarter.
Economists say there are several more timely indicators that could indicate a recession. Spending and consumer sentiment are key measures to consider, especially if Americans start buying fewer goods that are not needed, such as sofas or new cars. Some of these metrics suggest the economy may be starting to cool: consumer spending rose 0.2 percent in May, the weakest monthly gain this year. Retail sales have shown slight signs of weakening, and a recent Conference Board survey found that consumer confidence has fallen to its lowest level since February 2021. But overall, consumer spending has been relatively low. strong.
Recessions are also marked by widespread layoffs and a significant rise in the unemployment rate. Unemployment insurance claims are a good measure in real time, economists say, as the federal government publishes new data weekly. If more people apply for unemployment benefits, this could be an indicator that the labor market is starting to slow down. According to this standard, things do not look so bad: the labor market is still adding jobs and unemployment demands are not rising.
Many economists also point to Sahm’s rule, which measures whether the unemployment rate has risen sharply. The rule holds that a recession is triggered when the three-month average unemployment rate rises half a percentage point above its 12-month low. The current national unemployment rate of 3.6 percent is as low as last year, so the Sahm rule would be activated if the three-month average rose to 4.1 percent. The rule was created by Claudia Sahm, a former Fed economist, who said the United States is not in recession right now with this measure.
We can also learn many things by looking at the Americans who have historically been the hardest hit. Economists say black and Hispanic workers would probably suffer the weight first and be more vulnerable to losing their jobs. Younger workers, people with lower educational levels and workers with a criminal record would also be severely affected because employers could afford to be more selective, letting go of workers who were already on the edge.
“Right now, employers are still looking for workers. They are employing people who would normally go above and beyond, ”Sahm said.
Industries that are sensitive to rising interest rates, such as housing and manufacturing, could also see more drastic falls before the effects spill over into other sectors.
And they wouldn’t just be layoffs. With fewer job offers, it would be harder for Americans to change jobs if they are not satisfied with their careers, an advantage they have enjoyed during the pandemic, as workers have kept up with high demand. It could also be harder to get a raise if employers cut costs, part-time employees could struggle to work longer hours and unionization efforts could lose momentum.
“Families can’t buy what they need to feed their children or maintain their apartments,” Sahm said. “Small businesses fall because they don’t have customers coming in. It really starts to spiral out and ends up touching a lot of people.”
When are recessions officially called?
If strips of Americans are losing their jobs and sources of income, it’s debatable to what extent it matters if a recession is “official”. But it is useful to understand how the United States comes to this conclusion.
The NBER Committee, known as the Business Cycle Appointments Committee, analyzes a broad set of factors. The group officially defines a recession as a “significant decline in economic activity that is distributed throughout the economy and lasts more than a few months.”
Because there are delays in reporting federal data, the committee does not usually rush to announce the start of a recession. It also takes time to assess the figures, which are often subject to revisions, making it even more difficult to determine real-time recessions.
“Their goal is not to be fast or to be the first to declare a recession. That’s the job of others, “said Jeffrey Frankel, a former committee member and professor of economics at Harvard Kennedy School. very unlikely to be reviewed later. “
The committee announced the start of the last recession relatively quickly, about four months after it began in February 2020 (rising unemployment and the dire economic situation made the pandemic an unusual case). During the Great Recession of 2008, it took the committee about a year to declare a recession.
To make its decision, the committee analyzes indicators such as employment levels, GDP, personal income, retail sales and industrial production. Most of those indicators look strong right now, Frankel said.
Some economists have also predicted that if the country goes into recession next year, it could be relatively mild or short-lived, which could delay an announcement.
“When it’s lighter, it’s really harder to figure out what’s going on,” Frankel said.
There are worrying signs, but a recession is not inevitable
No one can really know if we’re heading for a recession, but economists and forecasters are starting to be more wary of one, in light of the Fed’s political movements.
Mark Zandi, chief economist at Moody’s Analytics, said he predicts a probability of about 40 percent of a recession next year. There are reasons for optimism, he said, as employment is rising and household finances remain solid because Americans have amassed savings during the pandemic. Consumer confidence in the economy has also weakened recently, “but it shows no signs of falling off a cliff,” Zandi said.
Karen Dynan, a professor of economics at Harvard University and a former chief economist in the Treasury Department, believes the risk of a recession in the coming months is roughly a release, but said a recession could be relatively short-lived. as there are many underlying economic conditions. fort.
“If we have a recession, I don’t think we’re going to move toward double-digit unemployment,” Dynan said. “I think it’s probably quite shallow and not very long.”
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