Inflation has been putting pressure on households across the country for over a year. And although prices are beginning to fall again, increasing consumer purchasing power, inflation is not yesterday’s problem. When planning your own household budget, it’s easy to see the lasting impact of higher prices.
With household budgets tight, many people have asked about the past year Are we in a recession?. A high-inflation environment doesn’t always result in a full recession, but many experts still expect the NBER to declare a recession later this year.
Let’s take a closer look at what the experts are saying at this uncertain economic time.
The central theses
- The National Bureau of Economic Research (NBER) says the US is not currently experiencing a recession.
- According to NBER, the last recessionary period lasted from February 2020 to April 2020.
- The NBER considers a wide range of economic information to determine whether or not a recession is occurring.
Recession: A Story With 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) considers several factors when determining one beginning of the recession.
The NBER Business Cycle Dating Committee defines a recession as “a significant drop in economic activity that is spreading across the economy and lasting for more than a few months.”
Ultimately, this committee looks beyond real GDP as a measure of whether the economy has slipped into recession. This can make it confusing for consumers to know whether or not we are in a recession.
The NBER has not declared a recession for 2022
Looking at the two definitions, the two-quarter definition of real GDP is easier for the average investor to grasp. For this reason, when there have been two consecutive quarters of negative real GDP growth, investors sometimes believe that we are automatically in recession.
The Bureau of Economic Analysis tracks US real GDP. Real GDP fell in the first and second quarters of 2022. Based on the common definition of a recession, a fall in real GDP for those two consecutive quarters would mean the country is in recession.
However, real GDP grew in the third quarter of 2022. The fall in real GDP in the first two quarters was not enough for the NBER to declare an official recession. For the NBER, real GDP is only one piece of the puzzle.
The NBER Business Cycle Dating Committee found that the country was not in recession in 2022. Instead, it concluded that the most recent recessionary phase occurred between February 2020 and April 2020.
Economic Indicators: A Closer Look
NBER’s finding that the US is still not in recession has been the subject of sharp political debate. While the country’s politicians debate 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 for 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 in 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 by just 1.1%. This has led some experts to believe that 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 consumer price index rose by 7.7% year-on-year. Although slightly better than previous summer 2022 numbers, inflation was still a major concern for the economy when third-quarter real GDP results were released.
In response to the sky-high prices, the Federal Reserve reacted increase in interest rates with the aim of curbing 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 steadily declined, falling to 4.9% in April 2023.
The Fed’s monetary policy is clearly having its intended effect, encouraging banks to save less money and lend less to each other. When the Fed raises interest rates, banks increase yields on savings products to encourage consumers to invest with them. Variable interest rates (like the interest rate on your credit card) increase in line with a higher prime rate.
The Fed’s monetary policy permeates the economy. If investors become more pessimistic about their money, corporate profits must fall. This reduces optimism about the future of the economy and leads to a further drop in investment.
The Fed’s monetary policy is a painful but necessary response to unsustainable economic growth.
unemployment
Perhaps the most important factor that has kept the NBER from declaring a recession is the unemployment rate. The relatively low unemployment rate is a glimmer of hope in these turbulent times. Last October, the unemployment rate rose to 3.7%, which is still a relatively low figure.
Since then unemployment has been between 3.4% and 3.7%. The low unemployment rate is one of the main reasons leading some pundits to believe a soft landing is a possibility. Many cite the Sahm Rule – a recession indicator meant to signal the start of an economic downturn – to argue that we are not in a recession.
The Sahm rule states that a recession can occur when the unemployment rate rises 0.50% or more from its low in the past 12 months.
While large waves of layoffs made headlines last year, most of the layoffs affected employees of large technology companies. They weren’t significant enough to drive up the unemployment rate significantly.
Despite the layoffs, there are still plenty of employers hiring new employees across the economy. Additionally, many other companies appear reluctant 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 appear to be losing confidence in the economic outlook. The National Federation of Independent Business’ Small Business Optimism Index fell to 91.2 in October.
Things haven’t recovered since then. The index hovered around 90 for the first few months of 2023, falling 0.8 points to 90.1 in March. This was the 15th straight month that the index has been below its 49-year moving average of 98.
According to the NFIB website, “24 percent of owners said inflation was their top business concern, down four percentage points from the previous month.” expect remain at a net negative of 47%.”
The cynicism small business owners feel about the future of the economy should not encourage pundits.
The housing market
Another area of the economy that has been affected by these turbulent times is the real estate market. When interest rates rise, potential homeowners are squeezed out of the market due to a lack of affordability.
The Home Builders Index fell to 38 last October, meaning homebuilders were not optimistic about the housing market at the time. However, in the months that followed, the index started turning positive again, reaching 45 in April this year.
How to invest during a recession
While the economy may not currently be in recession, economic indicators are consistent across the board. One of the most interesting things about the economy over the past year has been that inflation has reached staggering levels while unemployment has remained low. In such confusing times Building an efficient investment portfolio can be challenging.
As an investor, monitoring economic indicators across the economy is time consuming. However, this is important as changing market conditions can impact your investment portfolio.
Keep an eye on reports like the Consumer Price Index (CPI), which measures inflation in the US economy. If inflation falls further, it’s possible that sentiment among small business owners will turn positive. If unemployment stays low, it also bodes well for a possible recession in the second half of 2023.
It is important for investors to be aware of this Not all companies see their profits suffer in a recession. Consumer staples such as grocery chains and utilities tend to suffer less from a recession, while demand in retail outlets and non-essential goods and services softens.
It’s always a good idea to diversify your portfolio. During recessions, stock prices tend to fall overall, which some investors take advantage of to buy a cheap investment.
The conclusion
The NBER has not declared a recession for 2022, despite very high inflation and cynicism among small business owners. Now, in 2023, inflation is slowly coming down and housing indices are turning positive again.
Unemployment has remained low enough to prevent the NBER from declaring a recession, but slower real GDP growth and persistently high inflation are leading some experts to insist a recession is looming in the second half of 2023. Only time will tell.
We may not be in a recession, but most of us can feel the effects of a turbulent economy. As an investor, it is important to keep up with the changing market in order to make the best decisions for your financial goals.
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