December 4, 2022

US economic data sends mixed messages, complicating the answer to a seemingly simple question: is the world’s largest economy in recession?

Trade department figures on Thursday showing a second consecutive quarter of decline in gross domestic product bolstered what has become a politically charged debate.

News of the second consecutive decline – a common indicator of a recession – followed signs that business activity across the country is beginning to slow. The US housing market is faltering and consumers are growing gloomier as the Federal Reserve ramps up its efforts to quell the highest inflation rate in more than four decades with steep hikes in interest rates.

The official arbiters of whether the US is in recession or not – a group of economists from the National Bureau of Economic Research – have yet to make their formal verdict.

But policymakers in the White House have already made theirs.

Ahead of Thursday’s report, Treasury Secretary Janet Yellen said she would be “surprised” if the NBER declared the current moment a recession. She doubled down on that opinion at a news conference after the data was released, noting that the significant job losses, business closures and tight budgets typically associated with a recession “are not what we’re seeing right now.”

So does the Fed. Central bank chairman Jay Powell warned Wednesday that GDP will be revised multiple times and that the first iteration should be taken “with a grain of salt.”

Yet Republicans immediately seized Thursday’s data branding it’s “Joe Biden’s recession”.

Those who have embraced the idea that the US is in a recession point to the fact that when there has been consecutive GDP contraction in the past, a recession is eventually declared by the NBER. “The ‘official’ definition of recession is not consecutive quarters of negative real GDP,” said David Rosenberg, chief economist and president of Rosenberg Research. “But every time this happened in the post-war period, the economy just happened to be in recession.”

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Most economists share the view of the White House and the Fed that the US is not yet in a recession, but their confidence that the economy can avoid that outcome at a later date has waned significantly.

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“We cannot conclude from GDP data alone that we are currently in a recession,” said Blerina Uruci, an American economist at T Rowe Price. “This could be the prelude to a recession. . . and we have to be careful not to discount anything now because there is so much uncertainty.”

The NBER characterizes one as a “significant decline in economic activity that spreads across the economy and lasts for more than a few months.”

The organization’s committee of eight economists meets in closed-door meetings to make that decision, usually several months or a year behind schedule. The judgment is based on measures such as monthly job growth, consumer spending on goods and services and industrial production.

By those standards, the current economic backdrop unequivocally falls short of that threshold, Fed and White House officials say.

Last month, the economy added a healthy 372,000 jobs and the unemployment rate stabilized at an all-time low of 3.6 percent. There are roughly two job openings for every unemployed person, making this one of the tightest labor markets in recent history.

“We have never had a recession without layoffs, [and] I don’t think we’re close to a full cycle of layoffs. There’s just no evidence for that,” said Aneta Markowska, chief economist at Jefferies.

Economists point to the Sahm rule. Developed by former Fed employee Claudia Sahm, the rule states that a recession takes root when the three-month moving average of the unemployment rate rises at least half a percentage point above its 12-month low. By this measure, the unemployment rate would have to have crossed 4 percent to say the US is in recession.

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However, the GDP data shows signs of weakness beyond the headline figure, pointing to a much less cheerful consumer and weaker investment. Economists at Citigroup went so far as to say that mid-2022 could be a peak in activity.

“This is a pretty broad spending slowdown,” added Jonathan Millar, a former Fed economist who now works at Barclays. While he backed off the idea that the U.S. economy would soon enter a recession, he said it was a “very high probability” that it would happen next year and that it “really depends on how resilient we see the service sector.”

The US central bank is expected to continue its plans to tighten monetary policy even as the economy slows, after raising interest rates by a further 0.75 percentage point for its second consecutive meeting this week. Powell signaled further gains and market participants expect the benchmark key rate to rise to around 3.5 percent by the end of the year, a full percentage point higher than current levels.

The Fed chairman has maintained that rate hikes could lower inflation without causing painful job losses or a sharp downturn, but admitted again this week that the path to achieving that result has “clearly narrowed. . . and can narrow further”.

He also confirmed that the central bank remains strictly focused on eradicating high inflation and that it would be a worse outcome than excessively restricting the economy, raising concerns about a possible recession.

“This is what is happening in an environment where the Fed is trying to make its policy restrictive,” said Andrew Patterson, senior international economist at Vanguard. “You’re going to see a deterioration in production and eventually a rise in unemployment in an effort to drive down inflation.”

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