Breaking News
Investing Pro 0

Is the U.S. in a recession? Jobs and GDP tell a different story

Economy Jul 08, 2022 12:06PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Flags are seen outside the New York Stock Exchange (NYSE) in New York City, where markets roiled after Russia continues to attack Ukraine, in New York, U.S., February 24, 2022. REUTERS/Caitlin Ochs
 
US10Y...
+0.17%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) - By some early estimates, the U.S. economy, as measured by gross domestic product, may have shrunk in the three months from April through June. Add that to the decline from January through March, and that would be a contraction for two quarters in a row.

By an often-cited rule of thumb, that means the world's largest economy is in recession.

But deciding when a recession has begun or predicting when one might occur is not straightforward.

The "two quarters" definition is handy for analysts, journalists and the general public. But it is not how economists think about business cycles, partly because GDP is a broad measure that can be influenced by factors like government spending or international trade.

Instead they focus on data on jobs, industrial production, spending and incomes - and job growth in particular remains strong in the United States, with U.S. employers hiring more than expected in June, and raising wages.

GRAPHIC: U.S. private employment set to achieve full recovery https://graphics.reuters.com/USA-ECONOMY/JOBS/gkvlgerkopb/chart.png

On the downside, personal consumption data for May, released last week, showed spending and disposable income dropped on an inflation-adjusted basis. That sparked a host of gloomy forecasts for June, and increasing speculation that a downturn is coming soon, if it is not here already.

The weeks ahead are likely to include pitched debate about the real health of the economy. Whether the U.S. is headed for a recession or already in one is a growing concern for corporate chief executives and their employees, the Federal Reserve, and the administration of President Joe Biden.

IS A RECESSION ALWAYS TWO CONSECUTIVE Qs OF FALLING GDP?

Usually, but not always.

For example, GDP in 2001, after revisions, fell in the first three months of the year, rebounded in the next three months and declined again in the fall.

Even though there were not two consecutive quarters of declining GDP, the situation was a defined as a recession, because employment and industrial production were falling.

GRAPHIC: Two quarters of decline? https://graphics.reuters.com/USA-ECONOMY/UNEMPLOYMENT/egvbkggxxpq/chart.png

The COVID-19 pandemic recession only lasted two months, economists determined afterward, from March to April 2020, even though the steep drop in economic activity over those weeks meant GDP shrank overall in both the first and second quarters of the year.

WHO DECIDES, AND HOW?

In the United States the official call is made by a panel of economists convened by the National Bureau of Economic Research, and sometimes comes a year or more after the fact.

The private non-profit research group defines https://www.nber.org/business-cycle-dating-procedure-frequently-asked-questions#:~:text=A%3A%20The%20NBER's%20traditional%20definition,more%20than%20a%20few%20months recession as a "significant decline in economic activity that is spread across the economy and that lasts more than a few months."

The panel concentrates on things like jobs and industrial output that are measured monthly, not quarterly like GDP. It examines the depth of any changes, how long declines seem to be lasting, and how broadly any trouble is spread.

There are tradeoffs.

In the pandemic, for example, the depth of the job loss, in excess of 20 million positions, offset the fact that growth resumed quickly, leading the group to officially call the situation a recession in early June, before the end of the second quarter.

While each of three criteria - depth, diffusion, and even duration — "needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another," the group says.

SO ARE WE IN A RECESSION NOW?

Almost certainly not. While the "two quarter rule" has caveats and exceptions, there has never been a recession declared without a loss of employment. Jobs are being added in the U.S. by hundreds of thousands monthly.

GRAPHIC: Job loss and recession https://graphics.reuters.com/USA-ECONOMY/UNEMPLOYMENT/gdpzygglkvw/chart.png

The pace will likely slow, but there would need to be a sharp reversal for the current path of job growth to turn into one that looks like recession.

Industrial production, another factor that figured prominently in declaring the 2001 recession, has also been rising steadily, at least through May.

Since 1950 the United States has not experienced a two quarters-in-a-row contraction in GDP that was not utimately associated with a recession, which could make the current "are we or aren't we" debate even more contentious.

WHAT IS THE SAHM RULE?

One criticism of the NBER's role as a recession arbiter is that its members take their time in order to avoid reacting to changes in jobs, production or other data that prove temporary. A closer to real-time recession indicator, called the Sahm rule after former Fed economist Claudia Sahm, is based on the unemployment rate.

It states that when the 3-month rolling average of the unemployment rate rises a half a percentage point from its low over the prior 12 months, the economy has entered a recession.

The Sahm rule shows no sign of a U.S. downturn. Instead, the unemployment rate has been below 4% and falling or stable since January. WHY DOES THE R-WORD MATTER?

Discussion of a recession, and predictions that the U.S. economy is headed into one, can have an impact on what happens next. CEOs, investors and everyday consumers make decisions on where and how to spend money based on how they think sales, profits and employment conditions will evolve.

Economist Robert Shiller predicted in June that there was a "good chance" the U.S. would experience a recession as a result of a "self-fulfilling prophecy" as consumers and companies prepare for the worst. "The fear can lead to the actuality," he told Bloomberg.

WHAT IS A 'SHALLOW RECESSION?'

Recessions come in many shapes. They can be deep but brief, like the pandemic recession which sent the unemployment rate briefly to 14.7%. They can be deep and scarring, like the Great Recession or the Depression in the 1930s, taking years for the job market to regain lost ground.

Economists and analysts have recently flagged the possibility that the next U.S. recession may be a mild one. Even the shortest and weakest recessions have trimmed payroll jobs by more than 1%, which would currently amount to more than a million and a half people.

WHAT IS A GROWTH RECESSION? Another idea discussed by some economists and analysts is a "growth recession," in which economic growth slows below the U.S. long-term growth trend of 1.5 to 2 percent annually, while unemployment increases but not by a lot. This is the scenario mapped out by some Fed policymakers as the best case outcome of recent interest rate increases.

WHAT'S THE INVERTED YIELD CURVE LINK?

When the market rate for short-term borrowing exceeds that for a longer-term loan, it is known as an inverted yield curve, and seen as a harbinger of a recession.

Historically at least some part of the yield curve has inverted before every recent recession, and alarm bells started ringing when that happened on June 13.

Research from the Federal Reserve argues that the most widely followed yield-curve measure, the gap between yields on the two-year and the 10-year Treasury notes, doesn't actually predict much of anything; a better

gauge is the gap between three-month and 18-month rates, which has not inverted.

GRAPHIC: Yield curve inversion https://graphics.reuters.com/USA-ECONOMY/UNEMPLOYMENT/akvezllkjpr/chart.png

WHAT IS THE BEAR MARKET LINK TO RECESSION?

The recent steep stock sell-off has also set off alarms. Nine of 12 bear markets, or drops of more than 20%, that have occurred since 1948 have been accompanied by recessions, according to investment research firm CFRA.

(This story refiles to fix date in dateline, no change to content of story)

Is the U.S. in a recession? Jobs and GDP tell a different story
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
jack frost
jack frost Jul 08, 2022 2:56PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Were going into this very slowly eyes wide open , its coming out you might want to close them.
Suraj Sanap
Suraj Sanap Jul 08, 2022 12:10PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
yes you are right because actually data was very bad
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email