Is the US already in a recession?

Is the US already in a recession?

by Tiago Almeida, December 16 2022

During 2022, especially in the last few months, many people have wondered if the US economy was already in recession. This is no easy question as there is not a definitive answer. Consequently, economists, mathematicians, politicians and analysts have been heavily debating this concern, publishing articles, papers and making predictions for the foreseeable future.

According to general definition, a recession is a significant, widespread and persistent decline in economic activity. The popular benchmark is to assume that two consecutive quarters of decline in gross domestic product (GDP) define a recession. If we follow this, the US has indeed entered in one, having the economy shrank 1.6% in the first quarter of 2022 and then 0.6% in the second. However, the National Bureau of Economic Research (NBER), which officially declares if that country is in a recession or not, considers this approach too strict. They believe it is a stretch to consider that the US is already in a recession, especially while having a strong labour market (low unemployment rate) and many job openings and unfilled positions. Also, given that the GDP reverted direction in the third quarter of this year, having increased 2.6%, only two months of decline in economic activity is not bad enough for the organization to assume the US is in a recession.

Contrary to some optimism shown by NBER, public opinions on the matter are far from being positive. According to a recent study conducted by KPMG, 91% of the US’s CEOs interviewed believe that there will be a recession in the next 12 months. Moreover, the state of the economy was particularly relevant in the 2022 midterm elections. Looking at a recent poll conducted by CNN, overall, 75% of Americans believe that the economy is in recession and things in the country are badly today. When we look at economists, the overall opinion is the same. 72% of them predict a recession in 2023 according to a National Association of Business Economics (NABE) survey.

So, is the outlook so bad as most people predict? In short, the easiest way to answer is yes, but it could be worse. By far, the biggest threat to the economy nowadays is inflation. Last September, core US inflation hit a 40-year high and the country has been having inflation values 2 and 3 times larger than the target of 2% in the last year and a half. This has been wrecking the purchasing power of most Americans, triggering the Federal Reserve (FED) to increase interest rates, in order to slow down the economy and get inflation levels under control. In 2022 there were already 6 interest rate hikes, something that did not happened since the 1980s. Also, the benchmark interest rate that influences almost all borrowing costs are up to a range of 3.75/4 percent, the highest since 2008. Even though these policies might seem extreme, the truth is that inflation remains high, hence, it is expected that the FED increases interest rates multiple times in 2023. Presumably, these actions to control inflation levels come with a cost. With borrowing rates so high, families, and most importantly companies, do not want to indebt themselves and, therefore, they do not invest. This can make the economy to shrink, and a recession is a possible side effect of this. On the other hand, as stated before, the job market remains strong, with a low unemployment rate, pushing some of the fears away.

Nevertheless, FED’s actions might not be the only factor that can trigger or indicate a recession soon. If we look at the stock market, after a great 2021, the current year is heading to be the worst performing since 2008. The current bear market is a clear reflection of the pessimistic outlook investors have on the economy. Another key factor is the recent inversion of the yield curve. Generally, longer term bonds pay more than bonds with shorter maturities as, with time, bonds are more vulnerable to price changes and fluctuations. Thus, investors expect a premium, being the curve upwards. When it inverts, this means short-term debt-instruments carry higher yields than long-term, pointing out that the outlook for the more distant future is poor. Historically, an inverted yield curve has been used as an indicator of a pending economic recession. It has been successfully predicting every one of them since 1955.

In summary, there are multiple signs that the US, and consequently, the world is heading into a recession. From inflation to high interest rates, to an inverted yield curve, everything points out for the same. And one shall not forget the impacts of Covid-19, that have not disappeared completely and the dangers and occurrences of the Ukraine-Russia war that can even worsen the situation. It seems now, more than ever, the question of a recession is no longer if, but when.

Tiago Almeida