Economic data in the US are sending mixed messages, complicating the answer to a seemingly simple question: is the world’s largest economy in a recession?
Figures from the commerce department on Thursday showing a second consecutive quarter of decline in gross domestic product intensified what has become a politically charged debate.
News of the second straight decline — a common marker of a recession — followed signs that business activity across the country is beginning to slow. The US housing market is teetering and consumers are increasingly downbeat as the Federal Reserve ramps up its efforts to quell the highest inflation in more than four decades with big interest rate rises.
The official arbiters of whether or not the US is in recession — a group of economists at the National Bureau of Economic Research — are yet to make their formal judgment.
But policymakers in the White House have already made theirs.
Ahead of Thursday’s report, Treasury secretary Janet Yellen said she would be “amazed” if the NBER declared the current moment a recession. She doubled down on that view at a press conference after the data release, noting that the substantial job losses, business shutdowns and strained budgets that typically accompany a recession are “not what we’re seeing right now”.
So too has the Fed. Jay Powell, central bank chair, cautioned on Wednesday that GDP figures are revised multiple times and that the first iteration should be taken “with a grain of salt”.
Yet Republicans seized on Thursday’s data, immediately branding it “Joe Biden’s recession”.
Those who have embraced the notion that the US is in recession point to the fact that whenever there have been consecutive GDP contractions in the past, a recession is — more often than not — eventually called by the NBER.
“The ‘official’ recession definition is not back-to-back quarters of negative real GDP,” said David Rosenberg, chief economist and president of Rosenberg Research. “But every time this has happened in the postwar period, the economy just happened to be in recession.”
Most economists share the White House and the Fed’s view that the US is not yet in recession, but their confidence that the economy can avoid that outcome at a later date has declined markedly.
“Based on the GDP data alone, we cannot conclude that we are in a recession right now,” said Blerina Uruçi, US economist at T Rowe Price. “This could be the prelude to a recession . . . and we need to be cautious not to discount anything right now, because there’s so much uncertainty.”
The NBER characterises one as a “significant decline in economic activity that is spread across the economy and lasts more than a few months”.
The organisation’s committee of eight economists convene in closed-door meetings to make that determination, typically with a multi-month or year-long lag. The judgment is based on measures including monthly jobs growth, consumer spending on goods and services, and industrial production.
By those standards, the current economic backdrop unequivocally does not meet that threshold, say officials at the Fed and the White House.
Last month, the economy added a healthy 372,000 jobs and the unemployment rate steadied at a historically low level of 3.6 per cent. For every unemployed person, there are roughly two vacancies, making this one of the tightest labour markets in recent history.
“We’ve never had a recession without lay-offs, [and] I don’t think we are close to a full-blown cycle of lay-offs. There’s just no evidence of that,” said Aneta Markowska, chief financial economist at Jefferies.
Economists point to the Sahm Rule. Developed by former Fed staffer Claudia Sahm, the rule stipulates that a recession takes root when the three-month moving average of the unemployment rate rises at least half a percentage point above its low over the past 12 months. By this metric, the unemployment rate would need to have surpassed 4 per cent to say the US is in recession.
The GDP data did, however, include signs of weakness beyond the headline figure that suggest a far less buoyant consumer and flagging investments. Economists at Citigroup went so far as to say that mid-2022 may mark a peak in activity.
“This is a pretty broad-based slowing of spending,” added Jonathan Millar, a former Fed economist now at Barclays. While he pushed back on the notion that the US economy would tip into a recession soon, he said it was a “very strong possibility” that it would happen next year and it “really depends going forward on just how resilient we see the service sector”.
The US central bank is expected to push ahead with its plans to tighten monetary policy even as the economy slows, having lifted interest rates by another 0.75 percentage points this week for the second consecutive meeting. Powell signalled further increases to come and market participants expect the benchmark policy rate to rise to around 3.5 per cent by year-end, a full percentage point higher than today’s level.
The Fed chair has maintained that rate increases can bring down inflation without causing painful job losses or a sharp downturn, but conceded again this week that the path to achieve that outcome has “clearly narrowed . . . and may narrow further”.
He also affirmed the central bank remains strictly focused on curbing high inflation and that failing to do so would be a worse outcome than constraining the economy excessively — intensifying concerns about an eventual recession.
“This is what happens in an environment where the Fed is trying to have their policy be restrictive,” said Andrew Patterson, senior international economist at Vanguard. “You’re going to start to see turns for the worse in output and eventual upticks in unemployment in an effort to try to bring down inflation.”