Inflation has been putting pressure on households across the country for over a year now. And while prices have started to decrease again, increasing consumers’ purchasing power in the process, inflation is not yet yesterday’s problem. As you map out your own household budget, it’s easy to spot the continued impact of higher prices.
With household budgets feeling pressed, many people have asked for the past year whether we’re in a recession. A high inflationary environment doesn’t always translate into a full-blown recession, but many experts are still predicting the NBER will call a recession later this year.
Let’s take a closer look at what the experts are saying about this uncertain economic time.
Key Takeaways
- The National Bureau of Economic Research (NBER) says that the U.S. is not experiencing a recession right now.
- According to NBER, the last recessionary period lasted from February 2020 to April 2020.
- The NBER looks at a wide range of economic information when determining whether or not a recession is happening.
Recession: A Tale of Two Definitions
Many people believe that a recession has started when real gross domestic product (GDP) has fallen for two consecutive quarters. However, the National Bureau of Economic Research (NBER) looks at various factors when determining a recession’s start date.
The NBER Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Ultimately, this committee looks beyond the real GDP metric when determining if the economy has slipped into a recession. This can make it confusing for consumers to know whether we’re in a recession or not.
The NBER Didn’t Call a Recession in 2022
When looking at the two definitions, the two-quarters definition concerning real GDP is easier for the average investor to keep track of. Because of that, it’s sometimes the case that investors believe we’re in a recession automatically if there have been two consecutive quarters of negative real GDP growth.
The Bureau of Economic Analysis keeps track of the USA’s real GDP. In the first and second quarters of 2022, real GDP fell. Based on the general definition of a recession, falling real GDP in those two consecutive quarters would mean the country experienced a recession.
However, real GDP grew in the third quarter of 2022. With that, falling real GDP in the first two quarters was not enough for the NBER to call an official recession. To the NBER, real GDP is just one piece of the puzzle.
The NBER Business Cycle Dating Committee maintained that the country had not gone into a recession in 2022. Instead, it held that the most recent recessionary period happened between February 2020 and April 2020.
Economic Indicators: A Closer Look
The NBER’s determination that the USA still isn’t in a recession has been the topic of a sharp political debate. As the country’s politicians argue the finer points of the definition, it’s helpful to understand the broader 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 fell in the first and second quarters of 2022, it grew in the third quarter of 2022. The change of direction was seen as a step in the right direction.
Real GDP continued to grow in the fourth quarter, increasing by 2.6%. Growth slowed in the first quarter of 2023, with real GDP increasing only by 1.1%. This has led some experts to speculate a recession is more likely in the second half of 2023.
Inflation
The Consumer Price Index (CPI) is a widely used measure of inflation. In the October 2022 report, the CPI was up 7.7% from last year. Although that was a slightly better figure than earlier numbers from the summer of 2022, inflation was still a major problem facing the economy when third-quarter real GDP results were released.
In response to sky-high prices, the Federal Reserve has been raising interest rates with the goal of taming inflation. But, with a target inflation rate of 2%, the Fed still has a long way to go. Inflation peaked in June 2022 at 9.1%. Since then, inflation has consistently declined, dropping to 4.9% in April 2023.
The Fed’s monetary policy is clearly having its intended effect, encouraging banks to save money and borrow from each other less. When the Fed raises interest rates, banks will raise yields on savings products to encourage consumers to deposit money with them. Variable interest rates (like the rate on your credit card) increase in tandem with a higher fed funds rate.
The Fed’s monetary policy trickles through the economy. When investors are more bearish with their money, corporations see their profits take a hit. This reduces optimism about the future of the economy, further decreasing investment.
The Fed’s monetary policy is a painful but necessary reaction to unsustainable economic growth.
Unemployment
The factor that has maybe been most significant in keeping the NBER from calling a recession is the unemployment rate. The relatively low unemployment rate has been a beacon of hope in these tumultuous times. Last October, the unemployment rate rose to 3.7%, still a relatively low number.
Since then, unemployment has remained between 3.4% and 3.7%. The low unemployment rate is one of the main things encouraging some experts to say a soft landing is possible. Many cite the Sahm Rule – a recession indicator meant to flag the start of an economic downturn – to argue we aren’t in a recession.
The Sahm Rule holds that if the unemployment rate rises 0.50% or more from its low during the previous 12 months, a recession may be occurring.
While we saw large waves of layoffs hit the headlines this past year, the majority of the layoffs impacted employees working at major tech companies. They weren’t significant enough to drive the unemployment rate much higher.
Even with the layoffs, there are still plenty of employers hiring across the economy. Plus, many other companies seem hesitant to initiate major layoffs due to the challenge of attracting talent.
NFIC Small Business Optimism Index
Small businesses are 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 saw its Small Business Optimism Index fall to 91.2 in October.
Since then, things have not rebounded. The index has hovered around 90 in the early months of 2023, decreasing 0.8 points in March to 90.1. This marked the 15th consecutive month of the index sitting below its 49-year average of 98.
According to the NFIB website, “Twenty-four percent of owners reported inflation as their single most important business problem, down four points from last month.” The website also states, “Small business owners expecting better business conditions over the next six months remain at a net negative 47%.”
The cynicism small business owners feel about the future of the economy should not be encouraging to experts.
The Housing Market
Another area of the economy that has been impacted by these tumultuous times is the housing market. When interest rates rise, would-be homeowners get pushed out of the market due to a lack of affordability.
The Home Builders Index fell to 38 last October. This meant that builders were not optimistic about the housing market then. In the following months, however, the index started to turn positive again, hitting 45 in April of this year.
How to Invest During a Recession
While the economy might not be in a recession at the moment, the economic indicators are all over the board. One of the most interesting things about the economy this past year has been seeing inflation hit frightening highs while unemployment remains low. In such confusing times, it can be challenging to build an efficient investment portfolio.
As an investor, monitoring economic indicators across the economy is time-consuming. However, it’s essential because changing market conditions can impact your investment portfolio.
Keep your eye on reports like the Consumer Price Index (CPI), which tracks inflation in the US economy. If inflation continues to decrease, it’s possible the sentiment among small business owners will turn positive. If unemployment remains low, it will also bode well for any potential recession in the second half of 2023.
It’s important for investors to note that not all companies see their profits suffer from a recession. Consumer staples like grocery chains and utility companies tend to hurt less from a recession, while retail stores and less essential goods and services see demand slacken.
Diversifying your portfolio is always a good idea. Stock prices tend to decrease overall when recessions occur, which some investors take advantage of to buy into an investment at a low price.
The Bottom Line
The NBER didn’t call a recession in 2022, despite very high inflation and cynicism among small business owners. Now, in 2023, inflation is slowly decreasing and home-building indexes are turning positive again.
Unemployment has remained low enough to keep the NBER from calling a recession, but slowing real GDP growth and continued high inflation have some experts insisting a recession is coming in the second half of 2023. Only time will tell.
We might not be in a recession, but most of us can feel the impacts of a tumultuous economy. As investors, it’s critical to keep up with the changing market to make the best decisions for your financial goals.
The post Has the Recession Already Started? May 2023 Edition appeared first on Due.
This story originally appeared on Entrepreneur
