Has the recession already started? Edition May 2023

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Inflation has been pressing on households across the country for more than a year. And while prices have started to decline again, increasing the purchasing power of consumers in the process, inflation is still not a thing of the past. As you chart your own household budget, it’s easy to spot the continued impact of higher prices.

With household budgets feeling pressured, many people have asked in the past year if we are in a recession. A high-inflation environment doesn’t always translate into a full-blown recession, but many experts still predict that the NBER will announce a recession later this year.

Let’s take a closer look at what the experts are saying about this uncertain economic time.

key takeaways

• The National Bureau of Economic Research (NBER) says the US is not experiencing a recession right now.
• According to NBER, the last recession period lasted from February 2020 to April 2020.
• The NBER analyzes a wide range of economic information to determine whether or not a recession is taking place.

Recession: A Tale of Two Definitions

Many people believe that a recession has begun when real gross domestic product (GDP) has fallen for two consecutive quarters. However, the National Bureau of Economic Research (NBER) looks at several factors when determining a recession start date.

The NBER Business Cycle Citation Committee defines a recession as “a significant decline in economic activity that spans the entire economy and lasts for more than a few months.”

Ultimately, this committee looks beyond the real GDP metric when determining whether the economy has entered a recession. This can make it confusing for consumers to know if we are in a recession or not.

The NBER did not call for a recession in 2022

Looking at the two definitions, the definition of two quarters of real GDP is easier for the average investor to follow. This is why it sometimes happens that investors believe that we are automatically in a recession if there have been two consecutive quarters of negative real GDP growth.

The Bureau of Economic Analysis tracks US real GDP. In the first and second quarters of 2022, real GDP fell. By the general definition of a recession, a drop in real GDP in those two consecutive quarters would mean that the country experienced a recession.

However, real GDP grew in the third quarter of 2022. With that, the drop in real GDP in the first two quarters was not enough for the NBER to declare an official recession. For the NBER, real GDP is just one piece of the puzzle.

The NBER Business Cycle Citation Committee held that the country had not entered a recession in 2022. Instead, it held that the most recent recession period occurred between February 2020 and April 2020.

Economic Indicators: A Closer Look

The NBER’s determination that the US is not yet in a recession has been the subject of intense political debate. As the country’s politicians wrangle the finer points of the definition, it helps to understand the big picture.

With more details in mind, it’s easier to understand why the NBER committee didn’t declare a recession in 2022.

Real Gross Domestic Product

While real GDP fell in the first and second quarters of 2022, it grew in the third quarter of 2022. The change in direction was seen as a step in the right direction.

Real GDP continued to grow in the fourth quarter, increasing by 2.6%. Growth slowed in the first quarter of 2023, with real GDP rising by just 1.1%. This has led some experts to speculate that a recession is more likely in the second half of 2023.

Inflation

The Consumer Price Index (CPI) is a widely used inflation measure. In the October 2022 report, the CPI was up 7.7% from last year. Although that was a slightly better figure than the previous figures for the summer of 2022, inflation was still a major issue facing the economy when the third-quarter real GDP results were released.

In response to skyrocketing prices, the Federal Reserve has been raising interest rates in order to control inflation. But, with a target inflation rate of 2%, the Fed still has a long way to go. Inflation peaked in June 2022 at 9.1%. Since then, inflation has steadily declined, falling to 4.9% in April 2023.

The Fed’s monetary policy is clearly having the desired effect, encouraging banks to save money and borrow less from each other. When the Federal Reserve raises interest rates, banks will increase the returns on savings products to encourage consumers to put money into them. Variable interest rates (like the rate on your credit card) increase along with a higher federal funds rate.

The Fed’s monetary policy filters through the economy. When investors are more pessimistic with their money, corporations see their profits suffer. This reduces optimism about the future of the economy, further reducing investment.

The Fed’s monetary policy is a painful but necessary reaction to unsustainable economic growth.

Unemployment

The factor that has perhaps been most significant in keeping the NBER from declaring a recession is the unemployment rate. The relatively low unemployment rate has been a beacon of hope in these tumultuous times. Last October, the unemployment rate rose to 3.7%, still a relatively low number.

Since then, unemployment has hovered between 3.4% and 3.7%. The low unemployment rate is one of the main things encouraging some experts to say a soft landing is possible. Many cite the Sahm Rule, a recession indicator meant to usher in an economic downturn, to argue that we are not in a recession.

The Sahm Rule holds that if the unemployment rate rises 0.50% or more from its low during the previous 12 months, a recession may be occurring.

While we saw huge waves of layoffs hit the headlines last year, most of the layoffs affected employees working at major tech companies. They weren’t significant enough to drive the unemployment rate much higher.

Even with the layoffs, there are still plenty of employers hiring across the economy. Additionally, many other companies seem hesitant to initiate major layoffs due to the challenge of attracting talent.

NFIC Small Business Optimism Index

Small businesses are an important part of a healthy economy. Unfortunately, small business owners appear to be losing confidence in the economic outlook. The National Federation of Independent Business saw its Small Business Optimism Index fall to 91.2 in October.

Since then, things have not picked up. The index has been around 90 in the first months of 2023, falling 0.8 points in March to 90.1. This marked the fifteenth straight month for the index below its 49-year average of 98.

According to the NFIB website, “Twenty-four percent of homeowners reported inflation as their biggest business issue, down four points from last month.” The website also states: “Small business owners expecting better business conditions over the next six months stand at a net negative 47%.”

The cynicism small business owners feel about the future of the economy should not be encouraging to experts.

The housing market

Another area of ​​the economy that has been affected by these tumultuous times is the real estate market. When interest rates rise, prospective homeowners are put out of the market due to a lack of affordability.

The Home Builders Index fell to 38 last October. This meant that builders were not optimistic about the property market at the time. In the following months, however, the index began to turn positive again, reaching 45 in April of this year.

How to invest during a recession

While the economy may not be in a recession right now, the economic indicators are all over the place. One of the most interesting things about the economy last year was seeing inflation reach alarming levels while unemployment remains low. In such confusing times, it can be challenging to create an efficient investment portfolio.

As an investor, monitoring economic indicators throughout the economy is time consuming. However, it is essential because changing market conditions can affect your investment portfolio.

Keep an eye on reports like the Consumer Price Index (CPI), which tracks inflation in the US economy. If inflation continues to decline, sentiment among small business owners may turn positive. If unemployment remains low, it will also bode well for any potential recession in the second half of 2023.

It is important for investors to note that not all companies see their profits suffer a recession. Consumer staples such as supermarket chains and utility companies tend to suffer less from a recession, while retail stores and less essential goods and services see demand decline.

Diversifying your portfolio is always a good idea. Stock prices generally tend to decline when recessions occur, which some investors take advantage of to buy an investment at a low price.

The bottom line

The NBER did not call for a recession in 2022, despite very high inflation and cynicism among small business owners. Now, in 2023, inflation is slowly declining and home construction indices are back in the positive.

Unemployment has remained low enough to prevent the NBER from declaring a recession, but slowing real GDP growth and continued high inflation have some experts insisting a recession is looming in the second half of 2023. Only time will tell.

We may not be in a recession, but most of us can feel the impacts of a tumultuous economy. As investors, it is critical to keep up with the changing market in order to make the best decisions for your financial goals.

The charge Has the recession already started? Edition May 2023 first appeared in Earring.