The National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee is the singular body in charge of calling a recession. It defines a recession as a severe fall in economic activity that people would feel throughout the economy and lasts for more than a few months. Some variables it tracks include actual consumer spending, real income less government transfers, and industrial production. There are no fast rules or thresholds set in stone, so they determine whether the country is in a recession after studying statistics from the government.
So far, they have not declared a recession because they have not seen a significant decline in economic activity. You can’t really blame them as this is their current view according to the latest data they have received from the government:
So, according to the NBER, the economy is fine; there’s nothing to see here. They argue that there is a strong labor market and corporate earnings. Besides, recessions are not standard fair, with the US only experiencing a recession 8% of the time over the past 30 years.
But how is the economy really performing across the board? That’s what we seek to examine by studying the cold statistics below.
So, is the US in a Recession?
According to the general definition, a recession occurs when there are two-consecutive recorded negative quarters in the gross domestic product. Using that metric alone, the US was in a downturn earlier in the year.
But the NBER insists that you must take a holistic approach to get a clearer picture of the state of the economy because a recession indicates a significant decline in economic activities spread across the economy.
Therefore, here is an examination of 14 key economic indicators. If most show that the economy is ok, that will prove the NBER right. The opposite would be true.
1. Gross Domestic Product (GDP)
In the most recent quarter, economic growth was 2.6%. After the first half of the year’s GDP contraction, this is good news, but it is not exactly something to celebrate. Given the Federal Reserve’s aggressive stance, the economy’s ability to expand through 2023 is still in question. Keep in mind that we have been depleting the Strategic Petroleum Reserve aggressively, approximately 180 million barrels in 2022. We have been simultaneously exporting oil out of the US, generating a significant part of our increase in GDP.
2. Consumer Price Index (CPI)
According to data from the Labor Department’s Consumer Price Index, which tracks changes in prices across various products and services sold within the United States, the annual inflation rate has decreased to 8.2% from 8.3% in August.
During its November 2022 meeting, the Federal Reserve announced its fourth consecutive 75 basis points federal funds rate raise.
The less volatile core inflation rate increased to 6.6% in September from 6.3% in August, rising by 0.6% month-over-month. That annual core rise is the highest of its kind Since August 1982.
3. ISM Manufacturing Index
According to a survey by the Institute of Supply Management (ISM) manufacturing reading for October was 50.2. Manufacturing output increased at its slowest rate in nearly 2.5 years, with total readings at their lowest level since Spring 2020, so manufacturing is not doing well.
4. Industrial Production
Industrial production increased by 0.4% in September, and the index rose by 5.3% compared to the same period a year ago. Industrial production is doing well.
5. Retail Sales
In September, retail sales remained unchanged after increasing by 0.4% in August. Consumers are beginning to limit spending as their savings dwindle and prices rise.
The Fed hopes that higher interest rates will have several impacts, one of which is a consumer demand decrease. With further rate hikes in the pipeline, it’s easy to predict that retail sales are not doing well.
6. Conference Board Leading Indicators
In September, the leading index dropped by 0.4%, adding to its recent decline and suggesting that the economy is declining. This worrying trend is among the best indicators that a recession will hit the economy in the new year.
7. Markets Data
The stock market is perhaps the hardest hit of all the sectors, with the S&P 500 falling 19.1% this year, and the Fed’s decision to hike interest rates by yet another 75 basis points added to investors’ woes. Nasdaq is down 30%, The Dow 10%, and The Russell 2000 down 17.5%.
The treasury yield curve does not provide great news either, with the short-term interest rate yield performing better than the longer-term rates, traditionally a good indicator of an impending recession.
8. Unemployment Rate
The September unemployment rate of 3.5% shows the labor market is probably the only steady aspect of the economy. The Federal Reserve’s dual role is to ensure full employment and stable pricing and can now focus on reducing inflation because of the robust labor market.
9. Initial jobless claims
The Labor Department releases the initial jobless claims data weekly, showing how many people have started applying for unemployment benefits that week. The week of October 27 recorded initial job claims of 217,000, while November 5 saw a reported 225,000 initial claims.
A rise in initial unemployment claims may indicate a wider spread of layoffs, which would be consistent with the Fed’s push to lower inflation.
10. Job Openings and Labor Turnover Survey (JOLTS)
By September 30th, the number of job openings jumped to 10.7 million. Overall separations dropped to 5.7 million, while hires dropped to 6.1 million. This is good for the economy.
11. University of Michigan Consumer Confidence Survey
According to the University of Michigan’s Monthly Survey of Consumers, consumers’ sentiments improved in October. That represents a 2% month-over-month increase.
At 59.8%, consumer sentiment might seem rock solid, but it has dropped by 17% since this time last year. That’s due to increased gas prices in recent weeks, rising inflation, and unaffordable housing.
12. NFIB Small Business Optimism Index
The NFIB’s monthly Small Business Optimism Index increased by 0.3 points in September to 92.1. However, the index has been lower than its 48-year average for the past nine months in a row.
13. Housing Starts
As a result of higher borrowing rates and high prices, home construction declined by 8.1% from August. Developers are understandably cautious about taking on too much work in light of these factors.
14. NAHB Home Builders Index
The October reading fell to 38 on the Home Builders Index, showing that most builders consider the housing market weak. That has led to higher mortgage rates and a drop in the number of new single-family homes under construction.
Even though the economy isn’t technically in a recession, things aren’t looking great. Most of the key indicators above show a worrying trend in the economy. Still, not all the data points provided above give equal weight in determining if the US is experiencing a recession. Low unemployment and many available but unfilled positions have made the labor market the economic engine of the country. At the same time, consumers are handling rising inflation better now than they were earlier in 2022. The real estate and stock markets are both performing abysmally.
By Gurpreet Singh Padda, MD, MB