Recession? Not so fast…

Judging from the news these days, you would think the U.S. is on the brink of, or even in, a recession. Well, not so fast. The economy, in fact, continues to expand, and there are few signs that a recession is imminent. In this week’s Sight|Lines, we dig into this topic. We’ll start by defining a recession, explain why it matters, consider the possible causes of a recession, and take a look at what the data is currently telling us.

What is a recession?

The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” So, as practitioners, we monitor GDP to see if we experience not just one, but two consecutive quarters of negative growth. If we do, we’re in a recession.

Why does it matter?

At a high level, recession impacts our clients in two ways. First, and very directly, a recession is typically preceded by a sharp decline in stock prices, often a bear market, meaning the market falls 20% or more. This negative wealth effect shakes equity investors. The second primary effect of a recession relates to our day-to-day lives. Companies slow down hiring and may reduce their workforces, causing unemployment to rise and making it harder to stay in or find a job. Inflation picks up, which usually means the cost of living rises faster than wages for those who are employed, tough for most workers.

What are some possible causes of a recession?

Recessions may result from a meaningful slowdown in business activity, consumer consumption, or, less likely, government spending. For example, higher interest rates increased the cost of debt, so businesses may borrow less and slow down their activity. A negative wealth effect, from things like falling stock prices or declining housing prices, can shake consumers. Even the fear that we’re heading into a recession can shake consumer confidence. Consumer confidence is psychological, but its behavioral results can have a real impact on the economy. With less consumption, there is more risk of recession. And finally, higher inflation sets the bar higher for real GDP – gross results less inflation – to grow.

What’s the media saying?

In recent weeks in particular, the financial media has reported the risk of recession is rising, and that a recession may even appear imminent. When we track ASR U.S. Economic News Flow Index , we see a historical pattern showing that the sentiment has generally stayed in line with economic forecasting data like the ISM Composite PMI. But recently, the media tone has broken away from the data in a negative direction. 

What’s the current economic data telling us?

In our work, we always seek to look through to the fundamentals when analyzing the economy and markets. We monitor a proprietary checklist of market and economic data to look for signs of a recession. Out of 13 measures, three show caution: (1) a flat to inverted yield curve, which precedes recession eventually, (2) higher wage growth, which sometimes precedes higher inflation, and (3) truck shipments, which may be a sign of a business slowdown. But the other ten measures, like credit spreads, money supply, jobless claims, and job sentiment, point to expansion.

Some in the media have been painting a picture that the U.S. is on the brink of, or even in, a recession. But not so fast. The economy, in fact, continues to expand, the data looks positive, and there are few signs that a recession is imminent. We will continue to monitor economic and market activity going forward.

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