The official verdict is the U.S. is not in a recession.
The traditional, standard definition of a recession has been met. Textbooks define a recession as two consecutive quarters of negative GDP growth. GDP is Gross Domestic Product and is the total monetary or market value of finished goods and services produced within a country’s borders in a specific period of time. The U.S. GDP decreased at an annual rate of 1.6% in the first quarter of 2022 and decreased .9% in the second quarter, thus meeting the typical definition of a recession.
However, a U.S. recession is only official when the National Bureau of Economic Research (NBER) declares a recession. NBER is an American non-profit private research organization, and they are the unbiased organization that declares when the economy is or is not in a recession. NBER defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Given GDP reports, what’s stopping NBER from declaring a recession?
First, recessions are usually called late, after they have already started. The same is true of bull and bear markets. Outside the U.S., two declining quarters of GDP growth means recession. In the United States, NBER also looks at employment, output and household income.
Let’s start with U.S. employment. One of the main reasons NBER doesn’t believe we are in a recession is the health of the labor market. In a typical recession, the number of unemployed workers rises; the unemployed find it harder to find new jobs and the average length of unemployment increases. U.S. job growth has shown an acceleration in July 2022. The unemployment rate fell to 3.5% from 3.6% in June and the average hourly earnings rose .5% or 5.2% year over year. Labor market strength is allowing the Federal Reserve to continue raising interest rates to stem inflation and is stopping NBER from calling a recession.
NBER may not declare a recession, but the economy is slowing, as GDP portrays. When the Federal Reserve raises interest rates as the economy is slowing, recessions tend to follow.
Another indication of a forthcoming recession is an inverted yield curve. In a normal economic environment, the longer you lend someone your money, the more interest they will pay you. The lender is paid for the risk a longer time frame entails. However, in recent months, the interest rate on short-term treasuries (bonds issued by the U.S. government) were higher than the 10-year yield. This happens because the Federal Reserve has more power over short-term rates than long-term rates thus when the Federal Reserve tightens (raises interest rates), it can lead to higher rates on the short-term part of the curve. The yield curve has inverted 28 times and in 22 of those times, a recession followed. Therefore, an inverted yield curve precedes recessions but does not guarantee one.
The chances are increasing that we will see a recession. Global growth is slowing, and the Federal Reserve continues to fight inflation by raising the interest rates. This slows our economy. The small-business optimism index is at record lows and many Americans believe the U.S. economy is in a recession (according to a I&I/TIPP Poll). The good news is that given the employment climate, a U.S. recession is expected to be shallow. Stocks are also a leading indicator and typically start an upward trend within the first six months of a recession.
All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice. Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions. Review your personal situation with a professional before planning any gifting or estate planning.
Judy Loy is a Registered Investment Advisor, ChFC®, RICP® and CEO of Nestlerode & Loy, Inc. in State College.
