After growing for six consecutive quarters following the short, steep, Covid-induced recession in early 2020, the U.S. gross domestic product slipped two quarters in a row this year — by 1.4% in the first quarter and by 0.9% in the second quarter of 2022. It’s clear the economy is beginning to slow, but economists must now determine if a recession has in fact taken hold by analyzing a handful of factors that include but are not limited to GDP.
“The benefit of slowing economic growth should be lower inflation as demand for goods and services declines,” says Carl Ludwigson, managing director at Bel Air Investment Advisors in Los Angeles. “The risk is that economic growth slows too much, leading to a recession.”
That’s an outcome that a growing number of Americans are concerned about. Nearly eight in 10 Americans surveyed by Allianz say they’re worried that current world tensions will cause a recession, and fewer than half expect the economy to improve this year. Economists surveyed by The Wall Street Journal last month pegged the probability of economic recession, or correction, in the next 12 months at 28%.
Definitions of a recession vary, but a period of two consecutive quarters of negative economic growth is commonly considered a recession. However, the formal definition of a recession, according to the National Bureau of Economic Research, which is responsible for officially declaring a recession, considers other factors like personal income and household employment.
In response to a question regarding why the NBER doesn’t accept the two quarters definition of a recession, its website reads, “First, we do not identify economic activity solely with real GDP, but consider a range of indicators. Second, we consider the depth of the decline in economic activity. The NBER definition includes the phrase, ‘a significant decline in economic activity.’ Thus real GDP could decline by relatively small amounts in two consecutive quarters without warranting the determination that a peak had occurred. Third, our main focus is on the monthly chronology, which requires consideration of monthly indicators. Fourth, in examining the behavior of production on a quarterly basis, where real GDP data are available, we give equal weight to real GDI. The difference between GDP and GDI — called the ‘statistical discrepancy’ — was particularly important in the recessions of 2001 and 2007–2009.”
Aside from GDP, economists say there are other indicators they are watching to see if a recession is coming (or has already begun) in 2022. Look for:
— High inflation.
— A negative yield curve.
— Geopolitical uncertainty.
Periods of high inflation often precede periods of recession. As prices go up, consumers — the economic engine of the U.S. economy — can’t spend as much. That can create a chain reaction of fewer retail sales and fewer manufacturing orders, all of which often indicate a recession.
What it looks like now: Consumer prices are up 9.1% over the past year, according to the Consumer Price Index released in June, marking the largest 12-month increase since the period ending November 1981.
A Negative Yield Curve
A yield curve is a measure of investors’ return on bonds with different durations, or times to maturity. When shorter-duration bonds (such as a 2-year Treasury note) have a higher yield than longer-duration bonds (like a 10-year Treasury note), that is a sign that bond investors may have doubts about the direction of the U.S. economy.
What it looks like now: The yield curve has been flattening, and it briefly dipped into negative territory in early April.
In a global economy, instability in one part of the world can have ripple economic effects on other countries.
What it looks like now: Between the war in Ukraine and ongoing concerns about the spread and mutation of the coronavirus, there’s widespread uncertainty around international trade. Meanwhile, sanctions on Russia could push gas prices even higher. The World Bank lowered its economic outlook for the global economy from 4.1% to 3.2% for the year.
It’s also important to note that an economic slowdown does not always results in a recession, and that economic recessions are a normal part of modern economic cycles. While many companies go out of business in a recession, others thrive and grow in the rebound.
“None of these economic indicators are conclusive,” says Peter Earle, a research fellow at the not-for-profit academic think tank the American Institute for Economic Research. “If you look at the history of economic indicators, whether technical or those that are easier to see, there have been many times that they’ve spiked and nothing has happened.”
There are also some positive signs in the economy, including the low unemployment rate, rising wages and relatively resilient consumer spending.
While the thought of a recession can be scary, there are a few steps you can now to prepare for the possibility. By building an emergency fund (ideally, three to six months’ worth of expenses) and focusing on paying down debt, if possible, you can make it easier to weather the storm.
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Is the U.S. in a Recession? Watch for These Warning Signs originally appeared on usnews.com
Update 08/01/22: This story was published at an earlier date and has been updated with new information.