US growth has clearly weakened this year. After a contraction in the first quarter of this year, the second quarter is also tracking very weak and we may be in line for two consecutive quarters of negative growth. By some definitions this would mean the US economy is already in a recession.
However, we don’t see the current economic conditions as consistent with a true recession. A broader swath of data suggests that the economy is still growing, even if there’s been a loss of momentum. However, the risk of the economy falling into a recession in the future is still elevated.
Are we already in recession?
Undoubtedly, activity has slowed more than anticipated over recent months. And forward-looking survey data suggests that the US is likely to keep losing momentum.
Against this backdrop, our tracking for second-quarter GDP has fallen sharply. We now expect growth at 1.2% annualized.
However, a negative second-quarter GDP report is possible, which would mean that the US will have experienced two consecutive contractions and, thus, a “recession,” by some commonly cited definitions.
We don’t think so – here’s why
We believe that this definition of recession has several shortfalls.
- Its narrow focus on real GDP fails to take into account other aspects of economic health, such as labor market conditions
- It doesn’t capture the depth of decline in activity — consider that two very minor consecutive contractions still meet the threshold for recession
- GDP data can be volatile. We saw this in the first quarter when a large net trade drag pushed GDP lower, despite health consumption and investment trends.
- GDP data are prone to revision over time, which means that, over time, a recession could be revised away
So, how should we define a recession? This is a job that falls on the National Bureau of Economic Research (NBER), which looks at a range of indicators to establish “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
This type of view takes into account the depth, diffusion across an economy and duration of any downturn to provide a more accurate definition of recession. In order to determine these three Ds — depth, diffusion and duration — NBER uses several different measurements. These include:
- Two employment indicators (payrolls and employment in its household survey
- Real income trends (minus government transfer payments)
- Industrial production
- Real manufacturing and trade sales (which provide insight on consumer spending)
There’s no fixed rule around how weak each of these data points needs to be to call a recession. However, even a cursory look across these considerations makes it clear that we haven’t yet met this threshold for recession so far this year.
Chart 1: NBER recession indicators and downturns
Source: BEA, FRB, BEA/H, BLS/Haver, July 2022.
Especially with such a healthy labor market
Maybe the most compelling piece of evidence that the US economy isn’t in recession right now comes from the labor market. There have been 2.75 million jobs added to the economy this year at an average pace of nearly 470,000 per month.
This increase may be slower than in the earlier stages of post-Covid labor market recovery, but compared to the rest of history, this is extraordinarily rapid hiring — and not consistent with recession.
Further, the combination of strong labor demand and robust wages is driving strong nominal income growth. While rising inflation has eroded some of these gains, the trend in real income still doesn’t constitute a recession.
These indicators can turn quickly
While we don’t yet think the economy is in a recession it’s possible that a downturn could be coming more quickly than we’d originally expected. The NBER data are used to identify turning points, which means that the story could change dramatically in the next few months.
Indeed, looking at a historical comparison, employment didn’t start contracting during the Global Financial Crisis until several months after the start of the recession, as judged by NBER.
Not a recession, but a soft patch
A 2022 downturn isn’t our base case. Instead we believe that right now we’re going through a soft patch while the impact of energy and food price shock passes through the US economy. We expect the pace of inflation to ease a bit in the near term, which should help the economy regain some momentum. But we’ll be keeping an eye on the data — consumer spending, job openings, layoffs, claims, etc. — closely all the same.
...we believe that right now we’re going through a soft patch while the impact of energy and food price shock passes through the US economy
Once the economy has navigated this rough patch, we still expect the Fed’s monetary tightening to eventually tip the economy into recession. So the fact that we are not yet in a recession is less “good news” and more like “bad news delayed.”
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.