On Wednesday (August 3) the S&P 500 was up 1.56% for the day and 8.45% for the month. So why would anyone want to talk about the “R” word (recession)?
First, because the S&P 500 is not the economy. It’s a stock index, and “index” is, not coincidentally, an “indicator” of what’s going on in the broader economy.
Yes, in an early July poll, 58% of Americans said they thought the U.S. economy was in a recession. And that number had been rising since May. Still, many economic indicators remain strong. The current situation is unusual, and there is little consensus among economists as to whether a recession has begun or may be coming soon. [1]
A Recession by any Other Name
U.S. recessions and expansions are officially measured and declared by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), a private nonpartisan organization that began dating business cycles in 1929. [2]
The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” Because official data is typically reported with a delay of a month or two, it generally takes some time before the committee can identify a peak or trough. That’s why some short recessions (including the 2020 downturn) were over by the time they were officially announced. [3]
Mixed Signals
Consumer Spending: Over the last few months, economic data has been mixed. Consumer spending declined in May when adjusted for inflation, but bounced back in June. [4] Retail sales were strong in June, but manufacturing output dropped for a second month. [5] The strongest and most consistent data has been employment.
Employment: The unemployment rate has been 3.6% for four straight months, essentially the same as before the pandemic, which was the lowest rate since 1969. [6] In the 12 recessions since World War II, the unemployment rate has always risen, with a median increase of 3.5 percentage points. [7] So far, that hasn’t been the case. In fact, the economy added 372,000 jobs in June, the third consecutive month of gains in that range. [8]
Negative GDP Growth: Since 1948, the U.S. economy has never experienced two consecutive quarters of negative GDP growth without a recession being declared. However, the current situation could be an exception, due to the strong employment market [9], consumer spending, and business investment. [10]
The Fear Factor: Inflation
The fear factor in any recession talk these days is inflation, which ran at an annual rate of 9.1% in June, the highest since 1981. Inflation has forced the Federal Reserve to raise interest rates aggressively [11], but it still takes time for the effect of higher rates to filter through the economy.
The Takeaway
No one has a crystal ball, and economists’ projections range widely, from a remote chance of a recession to an imminent downturn with a moderate recession in 2023. [12] If that turns out to be the case, or if a recession arrives sooner, it’s important to remember that recessions are generally short-lived, lasting an average of just 10 months since World War II. By contrast, economic expansions have lasted 64 months. [13] To put it simply: The good times typically last longer than the bad—and, all things considered—these are still pretty good times.
Sources:
[1] The Wall Street Journal, July 17, 2022
[2] National Bureau of Economic Research, 2021
[3] National Bureau of Economic Research, 2021
[4] U.S. Bureau of Economic Analysis, 2022
[5] Reuters, July 15, 2022
[6] U.S. Bureau of Labor Statistics, 2022
[7] The Wall Street Journal, July 4, 2022
[8] U.S. Bureau of Labor Statistics, 2022
[9] U.S. Bureau of Labor Statistics, 2022
[10] MarketWatch, July 5, 2022
[11] Federal Reserve, 2022
[12] The New York Times, July 1, 2022
[13] U.S. Bureau of Economic Analysis, 2022
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