Are we in a recession? What may seem like a simple yes-or-no question is more complicated than you might think.
In late July, the U.S. Bureau of Economic Analysis (BEA) released second-quarter figures showing that, when adjusted for inflation, gross domestic product (GDP) had decreased for the second consecutive quarter. For some, that data met the technical definition of a recession.
Opinions are split. In a July Harvard-CAPS Harris poll, 42% of registered voters polled said they believe the country currently is in a recession and 42% said they believe a recession is coming in the next year.
Meanwhile, the National Bureau of Economic Research's (NBER) Business Cycle Dating Committee, which officially decides when a recession has occurred, has remained mum.
"The NBER looks at a lot of different economic data to determine whether we're in a recession, when it started and when it ends. Typically, the timing of a recession starting coincides with two quarters in a row of negative GDP growth, but that's not always the case," said BOK Financial® Chief Investment Officer Brian Henderson.
A closer look
For instance, the NBER considers the U.S. to have been in a recession from February 2020 to April 2020, despite the fact that GDP contracted by 31.2% in the second quarter of 2020 but grew 33.4% in the third quarter. "What tipped the scales was the pervasiveness of the decline in all sectors of the economy and the degree of slowdown," Henderson said.
On the flipside, this year's negative GDP growth is not necessarily indicative of a broad economic decline, noted BOK Financial Chief Investment Strategist Steve Wyett. "Are we really saying we've had a decline in trade and industrial activity? The short answer is no and the trade data is one of the big swing factors."
The U.S. has been importing more than it exports for years, which reduces overall GDP, Wyett explained. Although U.S. exports increased by $4.3 billion from May to June, the trade deficit still totaled $79.6 billion, according to the BEA. The current strength of the U.S. dollar relative to other world currencies can drive demand for imports and lower demand for exported goods, he added.
The fact that U.S. imports are still strong is a positive sign for the economy, despite the drag on GDP, because it means that U.S. consumers are still buying, Wyett said. "Generally, when we go through a recession, unemployment goes up and consumer spending goes down because people don't have as much money to spend on goods or services," he explained.
Month-over-month, consumer spending was up by 1.1% in June, according to the BEA. But some retailers, notably Amazon and Walmart, are already reporting a build-up in their inventories because consumers are buying less, Henderson noted.
Close watch on labor
Recessions often come with increases in unemployment, and that hasn't happened, either.
Unemployment actually fell from June to July, landing at 3.5%, while nonfarm payrolls increased by 528,000—trends you wouldn't expect to see during a recession, experts noted.
Meanwhile, the Federal Reserve continues to hike rates to try to combat inflation. The Fed has raised the Federal Funds rate—the overnight interest rate that banks charge each other to borrow money—four times this year, with more increases anticipated in September, November and December.
By design, rate hikes are expected to slow down the job market by decreasing the demand for workers and, in turn, decelerating the wage-price spiral that contributes to inflation.
The number of open jobs, which is still at nearly two open jobs for every unemployed person, is slowly declining, which means things are "moving in the right direction," Wyett said. If employers eliminate unfilled positions rather than ones currently held by employees, it means that the economy—and with it, inflation—is slowing without increasing the jobless rate.
"With fewer open jobs for the talent pool, the competition for labor starts to come down a little bit," Wyett explained. "As that happens, the pressure on managers to continue to pay prospective employees more for new jobs or to pay their existing employees more money to keep them from going to another job comes off the boil. That's how wage inflation then can decline."
This isn't 2008
Ultimately, if a recession does occur—or if the NBER decides one is already underway—it probably won't be like the one the U.S. experienced in 2008, Wyett and Henderson agreed.
"That recession was not only economically driven; it was financial system driven. That's why it was so deep and lasted for so long. Our banking system is in a lot better position today," Wyett explained.
Henderson, too, cited regulations such as the Dodd-Frank Act and stricter mortgage lending criteria as differentiating factors between now and the time leading up to the financial crisis.
"It's clear that the economy is going to slow down further because we haven't even felt the full brunt of the rate hikes yet," he said. "But if you look around and ask where there are excesses—whether consumers and corporations are over-leveraged like they were then—I don't see that now."
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