How to tell if the US economy is in recession

WASHINGTON (AP) — The government Thursday’s report that the economy grew at an annualized rate of 1.1% last quarter shows one of the most anticipated recessions in recent U.S. history is yet to come. . However, many economists now expect a recession in the April to June quarter, or soon thereafter.

The economic expansion in the first three months of the year was largely driven by healthy consumer spending, but shoppers became more cautious towards the end of the quarter. Companies are also cutting back on capital expenditures, a trend that continues.

The list of obstacles facing the economy continues to grow. The Federal Reserve has raised its benchmark interest rate nine times in the past year to its highest level in 17 years, raising borrowing costs for consumers and businesses. Inflation is easing slowly but steadily. Yet, price increases are still persistently high.

And last month, with the collapse of two major banks, a whole new threat emerged. A reduction in lending by the financial system could further weaken growth. Banks are tightening credit to preserve capital, making it harder for businesses to borrow and expand, according to a State of Business report released this month by the Federal Reserve. Economists at the Federal Reserve are predicting a “moderate recession” later this year.

Still, there is reason to expect that if a recession does occur, it will prove to be relatively mild. After massive layoffs during the pandemic, many employers who had trouble hiring may decide to keep most of their workforce even as the economy shrinks.

A six-month economic slump has long held the informal definition of a recession. But nothing is simple in a post-pandemic economy. Despite negative growth in the first half of last year, the job market remained strong, with very low unemployment and healthy levels of employment.

The direction of the economy has confused Fed policymakers and many private economists since COVID-19 struck in March 2020, suddenly unemploying 22 million Americans and halting rapid growth. I came.

The Federal Reserve has made it clear that it is willing to push the economy into recession if necessary to break high inflation, and most economists believe that.

So how likely is a recession? Here are some questions and answers.

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Why do many economists foresee recessions?

They expect aggressive Fed rate hikes and high inflation to overwhelm consumers and businesses, slowing spending and investment significantly. Businesses may also be forced to lay off staff, further reducing spending.

Consumers have so far proven resilient in the face of higher interest rates and rising prices. Still, there are signs that their toughness is beginning to crack.

Retail sales fell for the second month in a row. The Federal Reserve’s so-called Beige Book, which compiles anecdotal reports from businesses across the country, shows that retailers are increasingly seeing consumers resist higher prices. I’m here.

Credit card debt is also increasing. This shows that Americans are being forced to borrow more to maintain spending levels. This trend is probably not sustainable.

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What are some signs that a recession may have started?

The clearest signs are a steady rise in unemployment and a sharp rise in the unemployment rate. Economist and former Fed employee Claudia Sahm says that since World War II, a 0.5 percentage point increase in the unemployment rate over several months has always signaled the beginning of a recession.

Many economists monitor the number of people seeking unemployment benefits each week, an indicator of whether layoffs are getting worse. Weekly claims for unemployment assistance are slowly rising as companies ranging from Facebook’s parent company Meta to his industrial conglomerate 3M to his ride-hailing company Lyft announce furloughs. .

Still, employers steadily added 236,000 jobs in March and the unemployment rate fell from 3.6% to 3.5%, the lowest level in half a century.

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Are there other signals to look out for?

Economists monitor changes in interest payments or yields on various bonds for signals of a recession, known as an “inverted yield curve.” This happens when 10-year Treasury yields fall below short-term Treasury yields such as 3-month Treasuries. that’s abnormal. Longer-dated bonds typically pay investors a higher yield in return for binding their funds for a longer period of time.

An inverted yield curve generally means investors expect a recession and the Fed will be forced to cut rates. Inverted curves often precede recessions. Even so, it can take 18 to 24 months from the yield curve inversion to recession.

Yields on 2-year Treasuries have been above 10-year yields since last July, suggesting the market is expecting a recession soon. The 3-month yield has also risen well beyond his 10-year, a reversal phenomenon with an even better track record in predicting recessions.

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Who Decides When a Recession Begins?

The recession has been officially declared by the National Bureau of Economic Research, a group of economists. Business Cycle Dating Commission Defines Recession as “a significant decline in economic activity that spreads across the economy and lasts for more than a few months.”

The committee reviews recruitment trends. It also evaluates many other data points such as income, employment, inflation-adjusted spending, retail sales, and factory output. It assigns greater weight to measures of inflation-adjusted income that exclude government-supported payments such as Social Security.

However, the NBER typically does not declare a recession until well after the recession has begun, sometimes up to a year.

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Does high inflation usually lead to recessions?

Not always. Inflation he hit 4.7% in 2006, at which point he hit a 15-year high, but failed to trigger a recession. (The recession from 2008 to 2009 was due to the bursting of the housing bubble).

But if inflation is as high as last year (it hit a 40-year peak of 9.1% in June), a recession becomes more likely.

There are two reasons for this. First, the Fed raises borrowing costs significantly when inflation rises. Higher interest rates will pull the economy down as consumers can no longer afford to pay for homes, cars and other big purchases.

High inflation also distorts the economy by itself. Inflation-adjusted private consumption weakens. And businesses are becoming more uncertain about the economic outlook. Many of them have withdrawn their expansion plans and stopped hiring. Some people choose to quit their jobs and this can lead to high unemployment as there are no replacements.