The United States is not in a recession.
Probably.
Economic output, as measured by gross domestic product, fell in the first quarter of the year. Government data due this week may show that it fell in the second quarter as well. Such a two-quarter decline would meet a common, though unofficial, definition of a recession.
Most economists still don’t think the United States meets the formal definition, which is based on a broader set of indicators, including measures of income, spending and job growth. But they aren’t quite as sure as they were a few weeks ago. The housing market has slowed sharply, income and spending are struggling to keep pace with inflation, and a closely watched measure of layoffs has begun to creep up.
“A month ago, I was writing that it was very unlikely that we are in a recession,” said Jeffrey Frankel, a Harvard economist. “If I had to write that now, I would take out the ‘very.’”
Frankel served until 2019 on the Business Cycle Dating Committee of the National Bureau of Economic Research, the semiofficial arbiter of when recessions begin and end in the United States. The committee tries to be definitive, which means it typically waits as much as a year to declare that a recession has begun, long after most independent economists have reached that conclusion. In other words, even if we are already in a recession, we might not know it — or, at least, might not have official confirmation of it — until next year.
In the meantime, economists agree that the risks of a recession are rising. The Federal Reserve is raising rates aggressively to try to tame inflation, which has already contributed to large declines in the stock market and a steep drop in home construction and sales. Higher borrowing costs are all but certain to lead to slower spending by consumers, reduced investment by businesses and, eventually, slower hiring and more layoffs — all hallmarks of an economic downturn.
“Are we in a recession? We don’t think so yet. Are we going to be in one? It’s a high risk,” said Joel Prakken, chief U.S. economist for S&P Global Market Intelligence.
But the U.S. economy still has important sources of strength. Unemployment is low, job growth is robust, and households, in the aggregate, have lots of money in savings and relatively little debt.
“The narrative that the economy has slowed quite a bit and is showing signs of deterioration from higher inflation and higher interest rates, that narrative is solid,” said Ellen Zentner, chief U.S. economist for Morgan Stanley. “But when you look at factors like jobs, where we’re still creating three to four hundred thousand jobs a month, with an unemployment rate that has not begun to show signs of sustained increases, and the cushions of excess savings, healthy household balance sheets — these are things that go far in keeping the U.S. out of recession, or at least staving off recession for longer.”
Americans feel terrible about the economy right now — worse, at least by some measures, than at the peak of the pandemic-related layoffs in spring of 2020. It’s easy to understand why: The climbing cost of food, fuel and other essentials is eroding living standards. Hourly earnings, adjusted for inflation, are falling at their fastest pace in decades.
But to economists, “recession” is not just a generic term for a period of hard times. Recessions occur when the economy, as a whole, is shrinking.
“The economy can feel bad for a range of different reasons,” said Tara Sinclair, an economist at George Washington University. An economy that is growing slowly — especially if that weak growth is paired with high unemployment, high inflation, or both — could be hard on many families but still not meet the technical definition of a recession.
The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” What that means is that the downturn can’t be isolated to one or two sectors, like housing or technology, and it has to be severe and long — although there is some wiggle room. The collapse in economic activity in the first months of the pandemic was so broad and so severe that the bureau declared it a recession even though it lasted only two months.
Figuring out whether a recession is happening in real time is hard — economists often disagree. But it is usually clear in hindsight, which is why the dating committee waits so long to make its pronouncements.
“There’s never been a controversy about, was a particular movement a recession or not,” said Robert E. Hall, a Stanford economist who has led the Business Cycle Dating Committee since its inception in 1978.
If GDP declines again, does that mean a recession has begun?
Hall scoffed at formally declaring the beginning and end of business cycles based on GDP alone. A steep slowdown in one sector, like housing, might be enough to cause a mild decline in overall output but still fall short of the breadth and depth necessary to constitute a recession. On the other hand, the dating committee says the United States experienced a mild recession in 2001 even though GDP never contracted for two quarters in a row.
There is another problem: The GDP figures being released this week are preliminary, and will be revised several times as more complete data becomes available. Even the data from the first quarter aren’t final.
In fact, some economists think it is likely that the first-quarter data will eventually be revised to show a modest gain. That is because another measure of economic output, gross domestic income, grew in the first three months of the year.
In theory, gross domestic product and gross domestic income should be identical because they are measuring the same thing, from opposite sides of the economic ledger: One person’s spending is someone else’s income. But because the government can’t measure the economy perfectly, the two indicators can diverge — and recently, they have diverged by a lot. In the first quarter, gross domestic product fell at an annual rate of 1.6%, while gross domestic income grew at an annual rate of 1.8%.
Boragan Aruoba, a University of Maryland economist who has studied the two measures, said he trusted the income data more because the government has better data on income than on spending. He believes that the production data will eventually be revised to be closer to the income data, meaning the economy probably didn’t shrink in the first quarter at all.
Another option, recommended by the Commerce Department, is to use the average of the two measures rather than choose one. By that measure, the economy grew slightly in the first quarter.
How will we know when a recession begins?
The dating committee lists several indicators that it usually watches when declaring recessions, although it reserves the right to consider others. Most show that the economy is still growing, although more slowly than last year.
Consumer spending, for example, grew at a solid 1.8% annual rate in the first quarter, adjusted for inflation, and most forecasters believe it grew in the second quarter, too, albeit more slowly. Job growth has remained robust. Other measures, such as industrial production and inflation-adjusted income, have stalled in recent months, but haven’t fallen significantly.
Those indicators are backward-looking, however. To assess conditions in real time, forecasters typically look at other measures that have historically been better at showing the economy’s direction. The pandemic has made that more difficult, however, by scrambling typical patterns in spending and investment.
“It’s harder than usual to read the economy because we’re still in such an odd period,” said Karen Dynan, a Harvard economist and former Treasury Department official under President Barack Obama. “We’re seeing this post-COVID reorganization of the economy in addition to the loss of momentum, so the signals aren’t clean.”
For example, Dynan said, auto sales were usually a reliable signal of a slowing economy, because cars were a major purchase that consumers could put off if they were worried about losing their jobs. But supply-chain disruptions have depressed auto sales during the pandemic, making the data hard to interpret. If sales pick up in coming months, for example, does that suggest rising consumer confidence — or simply better availability of cars?
Still, forecasters said there were some numbers they would be watching closely — most important, the job market. Recessions, almost by definition, result in lost jobs and increased unemployment. And increases in unemployment, even fairly small ones, nearly always signal a recession.
The number of unfilled job openings has fallen a bit from record highs at the end of last year, according to data from the career site Indeed. Filings for unemployment insurance, an indicator of layoffs, have risen a bit in recent weeks. If those trends continue, a recession will seem more likely, said Aneta Markowska, chief financial economist for Jefferies, an investment bank.
But Markowska said it was just as likely that if inflation began to cool in the second half of the year, consumers would begin to feel better about the economy, and businesses would keep hiring, allowing the economy to escape a recession, for now.
“Consumers still have a lot of cash, they still have jobs, they’re still enjoying pretty good wage growth — the only reason things felt so much worse in the first half of the year was inflation,” she said. “It is sort of this race: Does the labor market crack before inflation begins to slow?”