Question Of The Day: Are We In A Recession?

In the summer of 2022, politicians, economists and market professionals engaged in a great semantic debate over whether or not the U.S. economy was in recession. The argument, invariably influenced by politics, came down to how you defined the word recession.

According to the general definition—two consecutive quarters of negative gross domestic product (GDP)—the U.S. entered a recession in the summer of 2022.

The organization that defines U.S. business cycles, the National Bureau of Economic Research (NBER), takes a different view. According to the NBER’s definition of recession—a significant decline in economic activity that is spread across the economy and that lasts more than a few months—we were not in a recession in the summer of 2022.

“We have a hard time believing the economy is in recession today, given a strong labor market and corporate earnings growth,” said Tim Holland, chief investment officer at Orion Advisor Solutions. “We also remind ourselves that recessions are uncommon, as our economy was in recession just 8% of the time over the past 30 years.”

Nevertheless, a recession may arrive soon. The Federal Reserve is determined to raise interest rates until inflation starts to moderate from sky-high levels. That may cause the economy to contract and enter into a recession.

To keep tabs on whether an economic contraction is imminent, we’ve devised the following recession tracker, which monitors 15 key indicators. Once most of the signs point downward, a recession is nigh.

Recession Tracker: Major Economic Data

Gross Domestic Product (GDP)

• Most Recent Report: Q3 GDP 2.6% (preliminary)
• Grade: Bad-ish

The economy grew by 2.6% up in the most recent quarter. While that’s welcome news after GDP declined in the first half of the year, it’s not exactly cause for celebration.

“This better-than-expected result was driven by improvements for international trade, as exports surged during the period while imports slowed,” said Sam Millette, fixed income strategist for Commonwealth Financial Network. “The underlying data was a bit more mixed, however, as personal consumption growth slowed during the quarter, in a sign that inflation took a toll on consumer spending.”

The question is whether the economy can continue to expand into 2023 given the Fed’s hawkish policy.

Consumer Price Index (CPI)

• Most Recent Report: October CPI +7.7%
• Grade: Bad

Inflation may have moderated somewhat from June and July, but it’s still sky-high and wrecking the purchasing power of everyday Americans. Price growth is so hot that the Fed is willing to increase unemployment and slow the economy even further to get inflation under control.

But it’s not coming down altogether rapidly.

“[W]hile it’s possible that we have passed the peak inflation point, the pace at which inflation is declining is still very slow,” said Nancy Davis, founder of Quadratic Capital Management.

The picture is somewhat brighter if you look at the Fed’s preferred inflation gauge, the core personal consumption expenditures index (PCE), which strips out volatile food and energy prices. In September, core PCE showed prices increasing by 5.1% compared to 12 months earlier. While that’s down from 5.4% in February it’s up a tick from July, and still well more than double the Fed’s 2% target.

ISM Manufacturing Index

• Most Recent Report: September ISM Manufacturing 50.2
• Grade: Neutral

This survey of corporate executives in industrial companies has been positive for a long time and remained so in August. According to this index, sentiment among executives has been positive—aka a reading above 50—for 29 consecutive months.

The Institute of Supply Management’s (ISM) purchasing managers index is a survey of purchasing and supply executives in over 400 industrial companies throughout the U.S.

The latest report showed that manufacturing rose at its weakest pace since almost 2.5 years, and the overall readings was the lowest since Spring 2020.

Industrial Production

• Most Recent Report: September Industrial Production 0.4%
• Grade: Good

Industrial production rose in September, while the July and August readings were revised higher.

“American manufacturing is going gangbusters, with the highest capacity utilization since the turn of the century,” said Bill Adams, Chief Economist for Comerica Bank.

The index was up 5.3% compared to the year earlier.

Retail Sales

• Most Recent Report: September Retail Sales 0%
• Grade: Neutral

Retail sales were unchanged in September, after gaining 0.4% the month before. Consumers, with eroding savings and increased costs, are starting to pull back a bit on their spending.

“The latest retail sales report adds to recent evidence that consumer staying power may be waning, but it’s showing few signs of breaking,” per a Wells Fargo Securities report.

Weakening consumer demand is one of the effects the Fed is hoping to engineer by raising interest rates.

Conference Board Leading Indicators

• Most Recent Report: September Leading Indicators -0.4%
• Grade: Bad

The leading index dropped by 0.4% in September, continuing its recent slide, signaling that the economy is slowing. This troubling development is one of the best indications that the economy may be heading into a recession beginning next year.

“Consumer expectations continued to weigh on the index, and hints at the puzzle of current economic conditions,” per a Wells Fargo Report. “Decades-high inflation, tighter policy and recession concerns are weighing on consumers perceptions, but households have yet to meaningfully demonstrate these concerns in their spending decisions.”

Recession Tracker: Markets Data

The Stock Market (S&P 500)

• YTD Performance: -1979% as of Nov. 10
• Grade: Bad

After a two-month bear market rally, stocks have declined after Fed Chair Jerome Powell’s Jackson Hole speech in late August and a higher-than-expected October inflation report. The Fed’s decision to raise interest by another 75 basis points only added to investor misery.

Powell reiterated the Fed’s commitment to higher interest rates to bring down inflation. Wall Street loves nothing more than cheap money, and traders had been hoping that the Fed would pivot from its hawkish stance given less-than-stellar economic data. The numbers are as grim as anything seen since 2008, and perhaps will end up being worse.

“[F]or the near term at least, the pain will be the name of the game,” said CFRA chief investment strategist Sam Stovall of the stock market.

Still, the market enjoyed a huge rally following October’s inflation report as traders hoped the Fed would curb rate hikes sooner than expected.

Treasury Yield Curve

• 10-year / 2-year Spread: -0.49%, as of Nov. 9
• Grade: Bad

When short-term interest rates yield more than longer-term rates, it’s called an inverted yield curve. This is typically a tell-tale sign of an impending recession, as the market believes economic growth will be weak. The yield curve has been inverted since early July.

Recession Tracker: Jobs Data

Unemployment Rate

• Most Recent Report: October Unemployment 3.7%
• Grade: Good

Despite wobbliness throughout the economy and concerns about a further slowdown in the coming months, the U.S. labor market remains robust. The unemployment rate has recovered to its pre-pandemic level and is down 2 percentage points from the same time last year.

Meanwhile, employers added 261,000 jobs in October after increasing payroll by 315,000 in September and 292,000 in August. Essentially, anyone who wants a job can find one.

The Fed has two mandates: Maximize employment and keep prices stable. A strong labor situation has allowed the Fed to focus on bringing down inflation.

“The U.S. economy is operating at a very good level today and over the prior few months, which has been tremendously positive,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income. “We worry that the Fed is now accepting an ability to overtighten.”

Initial Jobless Claims

• Most Recent Report: Nov. 5 Initial Claims 225,000
• Grade: Good

The initial jobless claims numbers are released every week and provide a look at how many people have begun claiming unemployment checks. Rising initial claims suggest more people are losing their jobs (and claiming unemployment).

Right now, the level of initial jobless claims looks pretty strong. However, they’ve increased a bit since earlier in the year as the Fed has increased interest rates. For instance, jobless claims were around 170,000 in March, compared to 225,000 now. A further increase would be consistent with the Fed’s push to lower inflation.

Job Openings and Labor Turnover Survey (JOLTS)

• Most Recent Report: September JOLTS 10.7 million
• Grade: Good

Even as the unemployment rate remains low, the total number of available jobs is near recent highs. There were roughly 7 million job openings in July 2019, compared to nearly 11 million now. For every two job openings, there’s about one person available to work.

The most recent report, though, hints that the labor market is somewhat loosening. There were almost 2 million more job openings six months earlier, meaning demand for workers has somewhat come down. While the labor market is still tight overall, market participants are keeping a close eye on the trend.

That’s because a weaker jobs picture may cause the Fed to adopt a less hawkish monetary policy.

Recession Tracker: Economic Confidence Data

University of Michigan Consumer Confidence Survey

• Most Recent Report: October Consumer Confidence 59.8
• Grade: Bad

Consumer sentiment ticked up in October, according to the University of Michigan Survey of Consumers, rising by 2% compared to the month before. Meanwhile, consumer expectations decreased as gas prices have started to rise in recent weeks.

That is, consumers feel less sanguine about the future than they do about the present.

“The current conditions component jumped the highest since April but expectations fell to a 3-month low, revealing the conflicting nature of the economy right now,” said Jeffrey Roach, chief economist for LPL Financial. “Inflation is high and housing is becoming less affordable, yet, hiring is strong and consumer balance sheets are solid.”

Overall, consumer sentiment is down 17% from this point last year.

NFIB Small Business Optimism Index

• Most Recent Report: October NFIB small business index -0.8 points
• Grade: Bad

The National Federation of Independent Business (NFIB) Small Business Optimism Index fell in October by 0.8 points to 91.3. However, the index has remained below its 48-year average for 10 consecutive months.

“It’s a complicated environment,” said Jason Greenberg, chief economist at Homebase.

Businesses, per Greenberg, are struggling with high costs and finding employees, but feeling good about the future. More than 64% of businesses in Homebase’s Owner Pulse Surveys believe they’ll be better off in 12 months, compared to 57% of organizations in July.

Recession Tracker: Housing Market Data

Housing Starts

• Most Recent Report: September Housing Starts -8.1%
• Grade: Bad

Home building dropped by 8.1% from August thanks to increased borrowing costs and high prices. Given these dynamics, builders are wary of overextending themselves.

“Home builders are feeling the impact of slowing demand, as higher borrowing costs weigh on prospective home buyers,” said Roach.

NAHB Home Builders Index

• Most Recent Report: October NAHB 38
• Grade: Bad

U.S. home builders are not optimistic. The Home Builders Index fell another eight points in its most recent reading to 38, indicating that most builders view the housing market as poor. This decline dovetails with higher mortgage rates and fewer single-homes being constructed.

What Is the Recession Tracker Telling Us?

The 15 data points in the Forbes Advisor recession tracker had the following grades:

• Good: 4
• Neutral: 2
• Bad: 9

The economy may not officially be in a recession, but it’s not looking good. Remember that not every data point we rank above would be weighted equally in deciding whether the U.S. is in recession.

The strongest parts of the economy are concentrated in the labor market, thanks to low unemployment and many unfilled jobs.

Meanwhile, consumers seem to be enduring high inflation better than they did earlier in 2022, and hopefully prices will continue to moderate in the coming months.

The parts of the economy susceptible to higher borrowing costs, such as the housing market and stocks, have not fared well.

How Does the NBER Define a Recession?

Despite negative economic developments this year, the NBER is not ready to say that the current economic expansion is over. That’s perfectly fair, even as GDP has declined for two consecutive quarters since employers are adding workers at an impressive clip.

The NBER is looking for a big drop in economic activity across the economy, not just in a few sections, and the labor market is a glaring outlier. Moreover, the decline generally needs to last more than a few months.

A big exception, of course, was the recent Covid Recession, which lasted just two months. But that decline was so severe and widespread that the NBER had to be flexible with its definitions.

Generally speaking, though, the NBER will want to see each of its three criteria for the decline-depth, diffusion and duration-met before making a call.

What Metrics Does the NBER Consider for Recessions?

The NBER is vague about which exact economic indicators it considers since it wants wiggle room to determine recession calls.

It typically considers items like “real personal income less transfers (PILT), nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, employment as measured by the household survey, and industrial production,” per.

However, it doesn’t assign a particular weight to any indicator.

A recession is a change of direction in economic activity, according to the NBER. Determining how and when that change occurs is a little bit of art and science.

When Was the Last Recession?

According to the NBER, the last recession occurred between February 2020 and April 2020.

That means the economy was already expanding again by May 2020, thanks to some state governments loosening restrictions and unprecedented direct payments and unemployment insurance helping consumers make-do.

Before that, the economy had last contracted between December 2007 and June 2009, which is otherwise known as the Great Recession. While that recession wasn’t as severe as the Covid Recession, it did last longer.

The expansion between the Great Recession and the Covid Recession is the longest business expansion in U.S. history, going back to 1854.