Fears of a recession have been looming since the Federal Reserve began hiking rates in March 2022. So, where is it?
In 2022, some believed that we were already in a recession, given that real gross domestic product (GDP) was negative for two consecutive quarters—the first and second of the year. For some, that data met the technical definition of a recession.
But the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee, which officially decides when a recession has occurred, has remained mum. Moreover, the Dallas Fed has asserted that the U.S. likely did not fall into a recession despite GDP being negative those quarters, citing economic indicators such as the strong labor market.
And is a recession coming this year? Well, that too, remains to be seen, but the probability has been increasing, said BOK Financial® Chief Investment Officer Brian Henderson.
“As inflation doesn’t come down as much as the Fed would like and the Fed has to hike rates more, it just continues to increase the odds of recession,” he explained.
A closer look
Yet even defining when a recession has occurred isn’t as simple as one might think.
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, the negative GDP growth in early 2022 was not necessarily indicative of a broad economic decline, noted BOK Financial Chief Investment Strategist Steve Wyett. “Was it really saying that there was a decline in trade and industrial activity? The short answer is no and the trade data was one of the big swing factors.”
The U.S. has been importing more than it exports for years, which reduces overall GDP, Wyett explained. The strength of the U.S. dollar relative to other world currencies in 2022 also may have driven demand for imports and lowered demand for exported goods, he added.
Close watch on labor
Recessions often come with increases in unemployment, and that hasn't happened, either.
Instead, unemployment has remained low, which is supporting consumer spending, Henderson noted. A strong consumer is key because consumer spending makes up roughly two-thirds of the overall U.S. economy. In fact, month-over-month, consumer spending has increased from January through April of this year.
Meanwhile, the number of job openings increased in April, which is the opposite of what they theoretically should be doing, as this shows higher demand for workers despite rising rates.
Normally, as the Fed continues to increase the Federal Funds rate to combat inflation, the rate hikes are by design supposed to slow down the job market by decreasing the demand for workers and, in turn, decelerating the wage-price spiral that contributes to inflation.
But the demand for workers isn’t decreasing, which is keeping inflation high, particularly in the services sector of the economy.
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."