A few factors are universally agreed upon as recession indicators:

1) A Decline in Gross Domestic Product (GDP). The rule-of-thumb is “two consecutive quarters of negative change in GDP” but that is strictly a rule-of-thumb. The GDP did decline in Q1 and Q2 of 2022.

2) Higher Unemployment Rates. This is the sticking point of the current “is it or isn’t it” argument. We’ve never had a recession with a labor market as hot as the current one and it’s problematic to label such growth as a recession. In our last issue, we examined the causes of the current labor shortage. As we discussed in our feature on the Federal Reserve, their goal is to strike that neutral rate where supply and demand are in equilibrium. When the labor market is hot, wages grow and consumers are able to absorb higher prices in goods and services. Which leads to the next typical condition of a recession:

3) Lower Consumer Spending. Increased wages do little good when inflation accompanies them. Historically, a constriction in the labor market has led to the drop in demand and lower consumer spending needed to significantly combat inflation. Our economy needs to reach the point where consumers reject higher prices to make this correction. This will be what finally pushes us into recognizable recession, likely in mid-to-late 2023. This has been a difficult point to pin down mostly because of the explosion in the savings rate after the pandemic hit. Prior to 2020, the US Personal Savings Rate averaged just over 8%. After 2020, that average shot up to over 12% with a few months reaching almost 25%. This has given consumers the ability to weather higher prices for much longer than anticipated and blunted the effects of rate increases, sustaining demand, and prolonging the length of time we will have to be in a higher sustained rate environment.

It is important to note that the extent of the downturn is critical in labeling a recession, meaning recessions affect every industry and sector. While we are seeing a cooling off in Q32022, many industries are still experiencing rapid growth. The National Bureau of Economic Research has a committee dedicated to defining our recession periods, the Business Cycle Dating Committee. What they look for is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”¹ Most recessionary periods in post WWII America last for less than 12 months, while expansions are closer to five years.

As we build budgets and schedules for our clients, keeping our eyes on the length and impact of a recession is critical to pricing commodities, scheduling manpower, and forecasting inflation.

Sources:

1. Whitehouse.gov