Inflation has been weighing on households across the country for over a year now. And although prices have begun to decline again, while increasing the purchasing power of consumers, inflation is not yet yesterday’s problem. When you plan your household budget, it’s easy to see the continuing impact of higher prices.
With family budgets struggling, many people have asked for last year are we in a recession. A high inflationary environment does not always lead to a full-blown recession, but many experts still predict that the NBER will declare a recession later this year.
Let’s take a closer look at what experts have to say about this volatile economic time.
- The National Bureau of Economic Research (NBER) reports that the US is not currently in a recession.
- According to NBER, the last crisis period lasted from February 2020 to April 2020.
- The NBER considers a wide range of economic information when determining whether a recession is occurring.
Recession: a tale of two definitions
Many believe that the recession began when real gross domestic product (GDP) fell for two consecutive quarters. However, the National Bureau of Economic Research (NBER) considers various factors in determining recession start date.
The NBER Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that extends to the entire economy and lasts for more than a few months.”
Ultimately, this committee looks beyond real GDP when determining whether the economy has slipped into recession. This may confuse consumers to know if we are in a recession or not.
NBER did not call for a recession in 2022
When considering the two definitions, it is easier for the average investor to keep track of the definition of two-quarters of real GDP. Because of this, it sometimes happens that investors believe that we are automatically in a recession if real GDP growth has been negative for two consecutive quarters.
The Bureau of Economic Analysis tracks US real GDP. In the first and second quarters of 2022, real GDP fell. Based on the general definition of a recession, a fall in real GDP during these two consecutive quarters would mean that the country has gone through a recession.
However, real GDP grew in the third quarter of 2022. At the same time, the fall in real GDP in the first two quarters was not enough for the NBER to officially call a recession. For the NBER, real GDP is just one piece of the puzzle.
The NBER Business Cycle Dating Committee has argued that there was no recession in the country in 2022. Instead, it ruled that the last period of recession occurred between February 2020 and April 2020.
Economic Indicators: A Closer Look
The NBER’s determination that the US is still not in recession has been the subject of heated political debate. As the country’s politicians argue over the finer points of the definition, it’s helpful to understand the bigger picture.
With more details in mind, it’s easier to understand why the NBER committee didn’t declare a recession in 2022.
Real gross domestic product
While real GDP declined in the first and second quarters of 2022, it rose in the third quarter of 2022. The change in direction was seen as a step in the right direction.
Real GDP continued to grow in the fourth quarter, rising by 2.6%. Growth slowed in the first quarter of 2023, with real GDP expanding by just 1.1%. This has led some experts to speculate that a recession is likely to occur in the second half of 2023.
The consumer price index (CPI) is a widely used measure of inflation. In the October 2022 report, the CPI rose by 7.7% compared to last year. While this was a slightly better reading than previous summer 2022 data, inflation was still a major problem facing the economy when third-quarter real GDP results were released.
In response to exorbitant prices, the Federal Reserve higher interest rates in order to curb inflation. But with a 2% inflation target, the Fed still has a long way to go. Inflation peaked in June 2022 and amounted to 9.1%. Since then, inflation has steadily declined, falling to 4.9% in April 2023.
The Fed’s monetary policy is clearly having the intended effect, encouraging banks to save money and borrow less from each other. When the Fed raises interest rates, banks will increase the yield on savings products to encourage consumers to invest in them. Variable interest rates (such as your credit card rate) increase in tandem with the higher federal funds rate.
The Fed’s monetary policy seeps through the economy. When investors are more bearish with their money, corporations see their profits drop. This reduces optimism about the future of the economy, further reducing investment.
The Fed’s monetary policy is a painful but necessary response to unsustainable economic growth.
The factor that was arguably the most important factor that prevented the NBER from declaring a recession is the unemployment rate. The relatively low unemployment rate has been a beacon of hope in these turbulent times. In October last year, the unemployment rate rose to 3.7%, which is still relatively low.
Since then, unemployment has remained between 3.4% and 3.7%. Low unemployment is one of the main factors leading some experts to talk about the possibility of a soft landing. Many cite Sam’s Rule – a recession indicator designed to signal the start of an economic downturn – to prove that we are not in a recession.
According to Sam’s rule, if the unemployment rate rises by 0.50% or more from the low of the previous 12 months, a recession could ensue.
While we saw big waves of layoffs last year that hit the headlines, the majority of the layoffs were for employees working at big tech companies. They were not significant enough to significantly increase the unemployment rate.
Even with layoffs, the economy is still full of employers hiring. In addition, many other companies seem to be hesitant to initiate mass layoffs due to problems attracting talent.
NFIC Small Business Optimism Index
Small business is an important part of a healthy economy. Unfortunately, small business owners seem to be losing confidence in the economic outlook. The National Federation of Independent Business’s Small Business Optimism Index fell to 91.2 in October.
Since then, things have not improved. The index hovered around 90 in the first months of 2023, dropping 0.8 points in March to 90.1. This marked the 15th consecutive month that the index has been below its 49-year average of 98.
According to the NFIB website, “Twenty-four percent of owners cited inflation as the top concern for their business, down four points from last month.” The website also says, “Small business owners expecting business conditions to improve over the next six months remain at a negative 47%.”
The cynicism of small business owners about the future of the economy should not be reassuring to experts.
Another area of the economy affected by these turbulent times is the housing market. When interest rates rise, potential homeowners are pushed out of the market due to lack of affordability.
The Home Builder Index fell to 38 last October. This meant that then the builders were not optimistic about the housing market. However, in the following months, the index began to turn positive again, reaching 45 in April of this year.
How to invest during a recession
While the economy may not be in recession right now, economic indicators are everywhere. One of the most interesting things about the economy over the past year is that inflation has reached frightening highs while unemployment remains low. In such troubled times building an effective investment portfolio can be challenging.
For an investor, monitoring economic performance across the economy is time consuming. However, this is important because changing market conditions can affect your investment portfolio.
Keep an eye out for reports like the Consumer Price Index (CPI), which tracks inflation in the US economy. If inflation continues to decline, perhaps the mood of small business owners will turn positive. If unemployment remains low, that will also bode well for any potential recession in the second half of 2023.
It is important for investors to remember that not all companies see their profits hurt by the recession. Essential consumer goods such as grocery chains and utilities tend to be less affected by the recession, while demand for retail stores and less essential goods and services is declining.
Diversifying your portfolio is always a good idea. Stock prices tend to decline in general when recessions occur, which some investors take advantage of to buy investments at a low price.
The NBER did not name a recession in 2022 despite very high inflation and the cynicism of small business owners. Now, in 2023, inflation is slowly declining, and home construction indexes are turning positive again.
Unemployment remains low enough for the NBER not to call it a recession, but slowing real GDP growth and continued high inflation are leading some experts to insist a recession will hit in the second half of 2023. Only time will tell.
We may not be in a recession, but most of us can feel the impact of a booming economy. It is essential for investors to keep up with the changing market in order to make the best decisions to achieve their financial goals.
Fast Has the recession already begun? May 2023 edition appeared first on Due.