WASHINGTON (AP) — By one common definition, the U.S. economy is on the cusp of a recession. Yet that definition isn't the one that counts.
On Thursday, when the government estimates the gross domestic product for the April-June period, some economists think it may show that the economy shrank for a second straight quarter. That would meet a longstanding assumption for when a recession has begun.
But economists say that wouldn't mean that a recession had started. During those same six months when the economy might have contracted, businesses and other employers added a prodigious 2.7 million jobs— more than were gained in most entire years before the pandemic. Wages are also rising at a healthy pace, with many employers still struggling to attract and retain enough workers.
The job market's strength is a key reason why the Federal Reserve is expected to announce another hefty hike in its short-term interest rate on Wednesday, one day before the GDP report. Several Fed officials have cited the healthy job growth as evidence that the economy should be able to withstand higher rates and avoid a downturn. Many economists, though, are dubious of that assertion.
The Fed is also trying to combat raging inflation, which reached a 9.1% annual rate in June, the worst mark in nearly 41 years. Rapid price increases, particularly for such essentials as food, gas and rent, have eroded Americans' incomes and led to much gloomier views of the economy among consumers.
The definition of recession that is most widely accepted is the one determined by the blandly named National Bureau of Economic Research, a nonprofit group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The committee assesses a wide range of factors before publicly declaring the death of an economic expansion and the birth of a recession — and it often does so well after the fact.
So if we're not in a recession, what's going on with the economy, which is sending frustratingly mixed signals? Here are some answers to those and other questions:
___
IS THE ECONOMY SHRINKING — OR NOT?
It did in the first three months of the year, when GDP contracted 1.6% at an annual rate. Economists have forecast that on Thursday, the government will estimate that the economy managed to grow at an annual rate of just below 1% in the April-June quarter, according to data provider FactSet. If accurate, that forecast would indicate that the economy isn't technically in recession by any definition.
Even if growth does go negative for a second straight quarter, Fed officials and Biden administration economists point to a lesser-known measure called “gross domestic income.”
GDP calculates the value of the nation's output of goods and services by adding up spending by consumers, businesses and governments. By contrast, GDI, as the name implies, seeks to measure the same thing by assessing incomes.
Over time, the two measures should track each other. But they often diverge in the short run. In the first quarter, GDI grew 1.8% — much better than the 1.6% decline in GDP.
As part of its judgment of whether an economy is in recession, the NBER considers an average of the two measures. In the first quarter, the average was 0.2%, suggesting that the economy expanded slightly.
___
WHAT ELSE DOES THE NBER MONITOR?
The NBER studies many other data points in determining recessions, including measures of income, employment, inflation-adjusted spending, retail sales and factory output. It puts greater weight on jobs and a gauge of inflation-adjusted income that excludes government support payments such as Social Security.
That gauge covers combined income from all workers, so it rises when the unemployed find a job or when existing workers receive a pay raise. The measure increased slightly in April and May after a flat reading in the first quarter of this year.
___
BUT DON’T A LOT OF PEOPLE THINK A RECESSION IS COMING?
Yes, because many people now feel more financially burdened.
With wage gains trailing inflation for most people, higher prices for such essentials as gas, food, and rent have eroded Americans' spending power,
On Monday, Walmart reported that higher gas and food costs have forced its shoppers to reduce their purchases of discretionary spending such as new clothing, a clear sign that consumer spending, a key driver of the economy, is weakening. The nation's largest retailer, Walmart reduced its profit outlook and said it will have to discount more items like furniture and electronics.
And the Fed's rate hikes have caused average mortgage rates to double from a year ago, to 5.5%, causing a sharp fall in home sales and construction.
Higher rates will also likely weigh on businesses' willingness to invest in new buildings, machinery and other equipment. If companies reduce spending and investment, they'll also start to slow hiring. Rising caution among companies about spending freely could lead eventually to layoffs. If the economy were to lose jobs and the public were to grow more fearful, consumers would further reduce spending.
The Fed's rapid rate hikes have raised the likelihood of recession in the next two years to nearly 50%, Goldman Sachs economists have said. And Bank of America economists now forecast a “mild” recession later this year.
___
WHAT ARE SOME SIGNS OF AN IMPENDING RECESSION?
The clearest signal that a recession is under way, economists say, would be a steady rise in job losses and a surge in unemployment. In the past, an increase in the unemployment rate of three-tenths of a percentage point, on average over the previous three months, has meant that a recession will soon follow.
Many economists monitor the number of people who seek unemployment benefits each week, which indicates whether layoffs are worsening. Last week, applications for jobless aid rose to 251,000, the highest level in eight months. While that is a potentially concerning sign, that is still a low level historically.
___
ANY OTHER SIGNALS TO WATCH FOR?
Many economists also monitor changes in the interest payments, or yields, on different bonds for a recession signal known as an “inverted yield curve.” This occurs when the yield on the 10-year Treasury falls below the yield on a short-term Treasury, such as the 3-month T-bill. That is unusual. Normally, longer-term bonds pay investors a richer yield in exchange for tying up their money for a longer period.
Inverted yield curves generally mean that investors foresee a recession that will compel the Fed to slash rates. Inverted curves often predate recessions. Still, it can take 18 to 24 months for a downturn to arrive after the yield curve inverts.
For the past two weeks, the yield on the two-year Treasury has exceeded the 10-year yield, suggesting that markets expect a recession soon. Many analysts say, though, that comparing the 3-month yield to the 10-year has a better recession-forecasting track record. Those rates are not inverted now.
___
WILL THE FED KEEP RAISING RATES EVEN AS THE ECONOMY SLOWS?
The economy's flashing signals — slowing growth with strong hiring — have put the Fed in a tough spot. Jerome Powell is aiming for a “soft landing,” in which the economy weakens enough to slow hiring and wage growth without causing a recession and brings inflation back to the Fed's 2% target.
But Powell has acknowledged that such an outcome has grown more difficult to achieve. Russia's invasion of Ukraine and China's COVID-19 lockdowns have driven up prices for energy food, and many manufactured parts in the U.S.
Powell has also indicated that if necessary, the Fed will keep raising rates even amid a weak economy if that's what's needed to tame inflation.
“Is there a risk that we would go too far?" Powell asked last month. "Certainly there’s a risk, but I wouldn’t agree that’s the biggest risk to the economy. The biggest mistake to make…would be to fail to restore price stability.”
Source: Read Full Article
