Friday, September 22, 2023

How do we know if we are in a recession?

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Shreya Christina
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A growing number of economists predict that the United States will be heading for a recession in the coming year. Polls show that some Americans believe we are already in it. But regardless of the gloomy forecasts and the gloomy mood among Americans, it may be a while before we really know if and when the country has entered a recession.

“By the time a recession is officially announced, we’ll be either way in or close to it,” said Josh Bivens, research director at the left-wing Economic Policy Institute.

Recessions in the US are officially explained by a commission by eight economists from the National Bureau of Economic Research (NBER). There is no hard time frame for determining recessions, but it is often lasts a year before the committee makes an announcement. (There are some general rules of thumb, like two-quarters of negative gross domestic product — but these aren’t hard-and-fast rules, and even those stats are backward-looking.)

Fears of a recession have increased as the Federal Reserve raises interest rates to cool consumer demand and contain the highest inflation rate in four decades. Prices are up more than 8 percent from a year ago, under some measures, making it more difficult for Americans to pay for food at the grocery store and gas at the pump.

Many economists agree that the country is not yet in a recession, although there are some worrying signs.

Due to many measures, the economy still looks reasonably resilient. The labor market has added hundreds of thousands of jobs every month and vacancies have fallen slightly, but still remain well above pre-pandemic levels at 11.3 million. Wage growth continues to rise in certain sectors, and new jobless claims are low. The unemployment rate stands at 3.6 percent, just above its pre-pandemic level, which was its lowest level in 50 years.

“It’s remarkably low,” Wendy Edelberg, the director of the Hamilton Project at the Brookings Institution, said of the unemployment rate. “I should really care about worrying a lot about the job market.”

Fed officials hope they can achieve a “soft landing” — weakening demand and lowering inflation without shaking the labor market. But it can be a tough balancing act, as declining demand is typically accompanied by a rise in unemployment as consumer spending declines and companies cut back on manufacturing and human resources, said Tara Sinclair, an economics professor at George Washington University.

To add to the challenge, the Fed does not have a great track record of making soft landings when inflation is as high as it is now and consumer confidence has continued to fall to record lows. If consumers sour the economy and think they could lose their jobs, they could cut spending sharply, hurting economic growth.

So, how do we know if a recession has hit before the NBER makes a formal announcement?

An unofficial definition of a recession is two consecutive quarters of declining gross domestic product, meaning the economy is contracting instead of growing. The economy shrank in the first quarter of 2022 after a strong period of growth in the last quarter of 2021.

But even if this month’s next GDP report shows a decline in the second quarter, many economists might not consider that a recession, as the job market remains strong. And while most recessions have identified the NBER meet this benchmarksome don’t: in 2001, for example, GDP decreased in the first quartergrew in the next quarter and then fell again in the third quarter.

Economists say there are multiple timely indicators that could point to a recession. Consumer spending and sentiment are both important measures to watch, especially if Americans start buying fewer goods that are not necessary, such as new banks or cars. Some of these statistics suggest that the economy may be starting to cool down: Consumer spending up 0.2 percent in May, the weakest monthly profit this year. Retail sales have demonstrated: slight signs of weakness and a recent Conference Board Survey found that consumer confidence has fallen to its lowest level since February 2021. But overall, consumer spending has been relatively strong.

Recessions are also characterized by widespread layoffs and a significant rise in unemployment. Unemployment claims are a good real-time measure, economists say, as the federal government releases new data weekly. If more people apply for unemployment benefits, this could be an indication that the labor market is starting to slow down. By this standard, things don’t look too bad: the labor market is still adding jobs and the number of applications for unemployment is not increasing.

Many economists also point out: the Sahm rule, which measures whether unemployment has risen sharply. The rule states that a recession is triggered as soon as the three-month average unemployment rate rises half a percentage point above its lowest point in the past 12 months. The current national unemployment rate of 3.6 percent is just as low as it was last year, so the Sahm rule would go into effect if the three-month average rose to 4.1 percent. The rule was created by Claudia Sahm, a former Fed economist, who said the United States is not currently in a recession due to this measure.

We can also learn a lot from looking at the Americans who have historically been hit the hardest. Economists say black and Hispanic workers are likely: be the victim first and more vulnerable to losing their jobs. Younger workers, the low-skilled and those with criminal records would also be hit hard as employers could afford to be more selective and let go of those already on the brink.

“At the moment, employers are still looking for employees. They employ people that they would normally skip,” Sahm said.

Industries sensitive to rate hikes, such as housing and manufacturing, may also experience a more drastic downturn before the effects spill over to other sectors.

And it wouldn’t just be fired. With fewer job openings, it would be more difficult for Americans to change jobs if they are unhappy with their careers, a benefit they have enjoyed during the pandemic as workers are in high demand. It could also be harder to get a raise if employers cut costs, part-time workers could struggle to work longer hours and union efforts could lose momentum.

“Families cannot buy what they need to feed their children or keep their apartment,” Sahm said. “Small businesses are going under because there are no customers coming in. It’s really starting to get out of hand and it ends up affecting a lot of people.”

When are recessions officially called?

When large segments of Americans lose their jobs and income sources, the importance of whether a recession is ‘official’ is called into question. But it’s helpful to understand how the United States comes to that conclusion.

The NBER committee — known as the Business Cycle Dating Committee — looks at a wide variety of factors. The group officially defines a recession as a “significant decline in economic activity that spreads across the economy and lasts for more than a few months.”

Because there are delays in reporting federal data, the commission usually doesn’t rush to announce the start of a recession. It also takes time to evaluate the numbers, which are often subject to revisions, making it even more difficult to determine recessions in real time.

“It’s not their goal to be fast or to be the first to declare a recession. That’s everyone’s job,” said Jeffrey Frankel, a former committee member and professor of economics at Harvard Kennedy School. “It is the job of the NBER Business Cycle Dating Committee to state in a quite authoritative manner that it is highly unlikely to be reviewed at a later date.”

The commission announced the onset of the last recession relatively quickly, about four months after it started in February 2020 (due to the spike in unemployment and the difficult economic situation, the pandemic was an unusual case). During the Great Recession in 2008, the committee lasted about a year to herald the start of a recession.

To make its decision, the committee looks at indicators such as employment levels, GDP, personal income, retail sales and industrial production. Most of these indicators seem strong right now, Frankel said.

Some economists have also predicted that if the country goes into recession next year, it could be relatively mild or short-lived, which could delay an announcement.

“Indeed, if it’s milder, it’s harder to figure out what’s going on,” Frankel said.

There are troubling signs, but a recession is not inevitable

No one can really know if we are headed for a recession, but economists and forecasters are becoming increasingly wary of a recession with the Fed’s policy moves.

Mark Zandi, chief economist at Moody’s Analytics, said he predicts a 40 percent chance of a recession next year. There are reasons for optimism, he said, as employment rises and household finances remain strong as Americans built up savings during the pandemic. Consumer confidence in the economy has also weakened recently, “but there are no signs of it falling off a cliff,” Zandi said.

Karen Dynan, an economics professor at Harvard University and a former chief economist in the Treasury Department, estimates the risk of a recession in the coming months at about a toss-up, but said a recession could be relatively short-lived, as many underlying economic circumstances persist. powerful.

“If we have a recession, I don’t think we’re moving toward double-digit unemployment,” Dynan said. “I think it’s probably quite shallow and not very long.”

Federal Reserve Chairman Jerome Powell has made it clear that the central bank committed to curbing inflation, even if it means risking a recession now to avoid a worse situation later. Minutes released on Wednesday The Fed’s latest meeting revealed that central bank officials were concerned that inflation would anchor in the economy, fueling their decision to raise rates aggressively.

While some economists think the Fed would step in quickly and withdraw its rate hikes if the labor market went into recession, others are less optimistic.

“Am I sure they would jump all over to stimulate the economy at any sign of a recession? I don’t have much faith in that,” says Bivens, the EPI economist. “I think they should, but I’m not that confident.”


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