By some early estimates, the U.S. economy, as measured by gross
domestic product, may have shrunk in the three months from April
through June. Add that to the decline from January through March, and
that would be a contraction for two quarters in a row.
By an often-cited rule of thumb, that means the world’s largest
economy is in recession.
But deciding when a recession has begun or predicting when one might
occur is not straightforward. The “two quarters” definition is not how
economists think about business cycles, because GDP is a broad measure
that can be influenced by factors like government spending or
international trade. Instead, they focus on factors like jobs,
industrial production, and incomes.
At issue now is personal consumption data for May, released last week,
which showed spending and disposable income dropped on an
inflation-adjusted basis. That sparked a host of gloomy forecasts for
June, and increasing speculation that a downturn is coming soon if it
is not here already.
The weeks ahead are likely to include a pitched debate about the real
health of the economy. Whether the U.S. is headed for a recession or
already in one is a growing concern for corporate chief executives and
their employees, the Federal Reserve, and the administration of
President Joe Biden.
DOESN’T FALLING GDP = RECESSION?
Not always. In 2001 gross domestic product, after revisions, fell in
the first three months of the year, but then rebounded in the next
three months to a level higher than it ended the year before. GDP
declined again in the fall.
Even though there were not two consecutive quarters of declining GDP,
the situation was dubbed a recession at the time, because employment
and industrial production were falling.
The pandemic recession only lasted two months, from March to April
2020, even though the steep drop in economic activity over those weeks
meant GDP shrank overall in both the first and second quarters of the
year. In 2016 there was a noticeable drop in industrial activity that
some dubbed a “mini-recession,” though GDP never declined.
WHO DECIDES, AND HOW?
In the United States, the official call is made by a panel of
economists convened by the National Bureau of Economic Research and
sometimes comes a year or more after the fact.
The private non-profit research group defines a recession as a
“significant decline in economic activity that is spread across the
economy and that lasts more than a few months.”
The panel concentrates on things like jobs and industrial output that
are measured monthly, not quarterly like GDP. It examines the depth of
any changes, how long declines seem to be lasting, and how broadly any
trouble is spread.
There are tradeoffs.
In the pandemic, for example, the depth of the job loss, in excess of
20 million positions, offset the fact that growth resumed quickly,
leading the group to officially call the situation a recession in
early June, before the end of the second quarter.
While each of three criteria – depth, diffusion, and even duration —
“needs to be met individually to some degree, extreme conditions
revealed by one criterion may partially offset weaker indications from
another,” the group says.
SO ARE WE IN A RECESSION NOW?
Almost certainly not. While the “two-quarter rule” has caveats and
exceptions, there has never been a recession declared without a loss
of employment. Jobs are being added in the U.S. by hundreds of
The pace will likely slow, but there would need to be a sharp reversal
for the current path of job growth to turn into one that looks like a
Industrial production, another factor that figured prominently in
declaring the 2001 recession, has also been rising steadily, at least
WHAT IS THE SAHM RULE?
One criticism of the NBER’s role as a recession arbiter is that its
members take their time in order to avoid reacting to changes in jobs,
production, or other data that prove temporary. A closer to real-time
recession indicator, called the Sahm rule after former Fed economist
Claudia Sahm is based on the unemployment rate.
It states that when the 3-month rolling average of the unemployment
rate rises half a percentage point from its low over the prior 12
months, the economy has entered a recession.
The Sahm rule shows no sign of a U.S. downturn. Instead, the
unemployment rate has been below 4% and falling or stable since
January. WHY DOES THE R-WORD MATTER?
Discussion of a recession, and predictions that the U.S. economy is
headed into one, can have an impact on what happens next. CEOs,
investors, and everyday consumers make decisions on where and how to
spend money based on how they think sales, profits, and employment
conditions will evolve.
Economist Robert Shiller predicted in June that there was a “good
chance” the U.S. would experience a recession as a result of a
“self-fulfilling prophecy” as consumers and companies prepare for the
worst. “The fear can lead to the actuality,” he told Bloomberg.
WHAT IS A ‘SHALLOW RECESSION?’
Recessions come in many shapes. They can be deep but brief, like the
pandemic recession which sent the unemployment rate briefly to 14.7%.
They can be deep and scarring, like the Great Recession or the
Depression in the 1930s, taking years for the job market to regain
Economists and analysts have recently flagged the possibility that the
next U.S. recession may be a mild one. Even the shortest and weakest
recessions have trimmed payroll jobs by more than 1%, which would
currently amount to more than a million and a half people.
WHAT IS A GROWTH RECESSION? Another idea discussed by some economists
and analysts is a “growth recession,” in which economic growth slows
below the U.S. long-term growth trend of 1.5 to 2 percent annually,
while unemployment increases but not by a lot. This is the scenario
mapped out by some Fed policymakers as the best-case outcome of recent
interest rate increases.
WHAT’S THE INVERTED YIELD CURVE LINK?
When the market rate for short-term borrowing exceeds that for a
longer-term loan, it is known as an inverted yield curve, and seen as
a harbinger of a recession.
Historically at least some part of the yield curve has inverted before
every recent recession, and alarm bells started ringing when that
happened on June 13.
Research from the Federal Reserve argues that the most widely followed
yield-curve measure, the gap between yields on the two-year and the
10-year Treasury notes, doesn’t actually predict much of anything; a
better gauge is the gap between three-month and 18-month rates, which
has not inverted.
WHAT IS THE BEAR MARKET LINK TO RECESSION?
The recent steep stock sell-off has also set off alarms. Nine of 12
bear markets, or drops of more than 20%, that have occurred since 1948
have been accompanied by recessions, according to investment research