- There is no universally agreed upon definition of a recession, which makes determining if we are in one complex.
- Traditional metrics like GDP decline and high unemployment point to the U.S. not being in a recession currently.
- However, some economists argue we may be in a “technical recession” based on other indicators.
- Forecasting recessions is challenging and projections for one in the near-term are uncertain.
- Understanding historical patterns, warning signs, and economic factors can provide context on recession likelihood.
The state of the economy is top of mind for many as high inflation persists and markets continue to experience volatility. With increased talk of a potential recession, a critical question arises – are we currently in one? Making that determination is not straightforward. This comprehensive guide will analyze the complex considerations around identifying recessions, historical patterns and statistics, current economic trends, expert projections, and the outlook for the future. Readers will come away with a nuanced understanding of the challenges in defining recessions, leading indicators to monitor, and context for making sense of conflicting opinions on where the U.S. economy may be headed.
Defining the start and end of recessions is notoriously difficult. Unlike metrics like GDP and unemployment, there is no single agreed-upon measure. Perspectives on the health of the economy can also vary greatly depending on one’s vantage point. This article will examine the most salient factors, trends, and expert opinions to evaluate our current situation. Understanding historical context, warning signs, and the limitations of predictions can help readers intelligently assess and plan for potential outcomes. The goal is to provide an objective look at where experts believe we are in the economic cycle and the probabilities of entering a downturn.
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What Constitutes a Recession?
The first step in evaluating whether we are in a recession is defining what one actually entails. There is no universal agreement on the criteria that must be met to officially declare the start of a recession. However, there are some common factors economists look for:
What is the traditional definition of a recession?
The “traditional” definition of a recession involves two consecutive quarters of declining gross domestic product (GDP). GDP represents the market value of all goods and services produced within a country over a given period. When GDP shrinks for two straight quarters, it signals the economy is contracting.
The National Bureau of Economic Research (NBER) uses this GDP metric along with other monthly indicators like employment numbers, retail sales, and industrial production to formally date recessions. Using their process, they have the authority to declare when recessions begin and end.
What qualifies as a “technical recession”?
In addition to the “official” designation, some economists point to other technical signals of a shrinking economy. These include measures like real income, industrial production, business investment and retail sales declining over an extended period of time. Several consecutive months of job losses can also indicate a recession is underway.
So even without an “official” declaration, many experts argue the economy can enter recession territory based on the preponderance of data pointing downwards. These technical recessions are typically identified in hindsight once a broader set of indicators clearly turns negative.
How long do recessions typically last?
There is considerable variation in the duration of recessions:
- The longest recession since World War II was 18 months from March 2001 to November 2001.
- The Great Recession from December 2007 to June 2009 lasted 18 months.
- The short-lived recession in 2020 as a result of COVID-19 was just 2 months.
- On average, recessions since 1945 have lasted 10 months.
So while the average duration is less than a year, they can persist for multiple years depending on severity. The unique circumstances driving each recession impact how long declines endure.
Is the U.S. Currently in a Recession?
Given this context on the varying definitions, what do the data indicate about the current health of the U.S. economy?
What do the traditional metrics show?
According to GDP and determinations by the NBER, the U.S. does not appear to be in a recession as of mid-2022.
- GDP decreased at an annualized rate of 0.9% in the second quarter after falling 1.6% in the first quarter. While growth has slowed, GDP has not declined for two straight quarters yet.
- The NBER has not declared the start of a new recession. Their latest determination was the short 2020 downturn that lasted just two months.
So based on the traditional metrics, the economy is not officially in a recession currently. However, growth is certainly slowing.
What about unemployment?
The unemployment rate sits at 3.7% as of July 2022, among the lowest levels in decades. During recessions, unemployment typically rises steadily, often into the high single digits.
For example, unemployment peaked at 10% during the Great Recession. Joblessness has not exhibited a sustained increase so far in 2022. The low unemployment rate indicates the labor market remains resilient. However, some slowing in hiring has emerged which bears monitoring.
What signals could indicate a “technical recession”?
While GDP and jobs data do not point to a recession currently, some other measures are flashing warning signs:
- Retail sales fell in May and June, indicating consumers are pulling back spending.
- Industrial production has slowed, with manufacturing output declining in the first two quarters of 2022.
- Business investment contracted in Q1 and was flat in Q2, likely due to rising costs and interest rates.
- Real disposable personal income, adjusted for inflation, has fallen slightly in recent months.
These real-economy measures declining in tandem often foreshadow recessions. While none have dropped steeply yet, the breadth of declines suggests the economy may be entering “technical recession” territory based on totality of data. However, these monthly measures can be volatile. More time is needed to determine if the downtrends will persist.
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Economic Forecasts and Recession Odds
Given the mixed signals in current data, economists look to various forecasting models and projections to gauge recession likelihood in the near future. However, these predictions come with ample uncertainty.
What are economic projections saying?
Many economic outlooks foresee slower growth and even potential contraction in late 2022 into 2023:
- The Federal Reserve predicts real GDP growth will be just 1.7% in 2022 and only 1.1% in 2023.
- Bloomberg’s monthly economist survey in July found respondents expect a 44% probability of a recession within the next 12 months.
- Fannie Mae’s June 2022 economic forecast predicted a “mild recession” in mid-to-late 2023 based on expected Fed tightening.
So while the timing is uncertain, many expect slowing growth at best and contraction at worst in coming quarters. However, economic predictions are notoriously prone to error so these should be taken with caution.
Why is forecasting recessions difficult?
Economists have a poor track record in predicting when recessions will actually begin. In a review of private sector forecasts from 1968 to 2008, the Federal Reserve found analysts consistently underestimated the likelihood of recessions. Challenges in forecasting downturns include:
- Complexity of the economy makes cause-and-effect difficult to model
- Relationships between variables changing over time
- Difficulty predicting policy responses and impacts
- Role of unexpected sociopolitical shocks
Given these challenges, economist projections are more useful for mapping scenarios rather than pinpointing turning points. The wide array of estimates highlights the inherent uncertainty.
Historical Patterns and Warning Signs
Since precise recession forecasts are limited, examining historical trends and relationships can provide useful context on where the economy may be headed.
What typically happens before recessions?
Several factors have often preceded past recessions:
- Inverted yield curve: Short-term interest rates become higher than long-term rates, indicating declining confidence in the future.
- Restrictive monetary policy: As the Federal Reserve raises rates to fight inflation, it can overcorrect and tightened policy leads to slower growth.
- Commodity price shocks: Surges in prices of key inputs like oil have preceded downturns by impacting production costs.
- Elevated inventories: Excessive unsold goods can foreshadow waning demand.
- Stock market declines: Falling equity values can shake business confidence and produce a wealth effect lowering consumer spending.
Many of these indicators have been observed in 2022, signaling plausibility of approaching recession territory. However, their predictive abilities are imperfect.
How do economic conditions today compare to previous recessions?
Some parallels and differences exist between current conditions and those preceding past recessions:
- Inflation is at 40-year highs, similar to periods before prior recessions. However, the labor market appears much stronger now.
- Aggregate private debt levels are relatively low today compared to history, suggesting less risk of financial crisis.
- Consumers entered this period with unusually high savings, unlike entering past recessions. However, savings buffers are now declining.
- Home construction and manufacturing activity have already slowed considerably, matching patterns ahead of previous downturns.
There is no precise historical precedent for today’s mix of economic conditions. While some signals echo previous cycles, unique variables like post-pandemic shifts make comparisons less straightforward.
Signs to Monitor for an Upcoming Recession
Given the uncertainties and mixed signals, what metrics may offer the clearest advanced warning if a recession is approaching?
What developments would indicate growing recession risk?
Some key indicators to monitor closely in coming months include:
- Unemployment steadily rising: The clearest historical indicator that a recession is taking hold is sustained job losses leading to high unemployment. So far layoffs remain limited.
- Corporate earnings declining: If overall earnings growth for public companies turns negative or levels off, it would signify declining business activity.
- Surveys of consumer sentiment worsening: Measures like Consumer Confidence Index and University of Michigan Sentiment survey declining further would signal households are becoming more pessimistic.
- Housing slowdown accelerating: Home construction, existing home sales, and housing starts dropping rapidly from current levels would imply vanishing demand.
Sustained deterioration in these areas, especially employment, would imply recession risks are rising quickly. However, economists emphasize identifying downturns in real-time is challenging even with close monitoring of monthly data.
How certain are recession predictions for 2022-2023?
Most economists believe chances of a recession are elevated, but offer widely varying estimates of timing and severity. Bloomberg’s July 2022 economist survey showed the average probability of recession within 12 months was 44%, up from 30% a year prior. However, some economists put the odds below 30% while others see likelihood over 60%.
This wide range demonstrates the inherent uncertainty in economic forecasting. While higher recession odds are consensus, pinpointing emergence or depth is too complex for accurate predictions. Economic conditions can shift rapidly. So time will tell whether projections of near-term recession materialize or a soft landing is achieved.
Determining if the U.S. economy is in recession territory currently is complicated by mixed signals across data points and the lack of consensus on defined criteria. The traditional metrics of GDP contraction and rising unemployment indicate the country is not in recession as of mid-2022. However, areas like production, retail sales, and investment show emerging downward trends that could portend a “technical recession” based on overall weight of evidence.
Economist opinions range from predicting mild recession to soft landing scenarios. History shows their ability to forecast downturns is limited. While risks appear elevated looking forward, the precise timing, length, and severity of a potential recession is unclear. Indicators like job losses and sentiment shifts could provide the clearest advanced warning. Close monitoring of monthly data and alternative indicators may offer the best sense of direction for the economy.
In summary, while the U.S. economy faces growth headwinds, declarations that a recession has definitively started are premature based on current data. Carefully watching for deterioration in key metrics can help determine if the likelihood of a downturn is rising. But predicting economic turning points remains an inexact exercise. Maintaining flexibility and vigilance as more data arrives in coming months will be key for businesses, policymakers and consumers looking to gauge recession risks.