Are you worried about the possibility of a recession? Do you want to learn how to spot the signs of an economic downturn before it’s too late?
With the current economic climate, it’s more crucial than ever to understand the signs of a recession. In this blog post, we’ll discuss the key indicators of a recession so that you can prepare yourself and your business before a potential economic downturn.
Who Decides When We Are in Recession?
The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is the official body in the United States responsible for determining the start and end dates of recessions in the US economy. The committee is composed of a group of economists who evaluates a variety of economic indicators to determine whether or not the country is currently in recession.
Usually, the committee waits for a few months after a recession has begun to declare its occurrence. This is because it takes some time to gather and study economic data. After the committee confirms that a recession has happened, it discloses the dates of the highest and lowest points of the business cycle.
It’s crucial to understand that when the NBER announces a recession, it’s not a prediction or a forecast. Rather, it’s a look back at already collected economic data. The purpose of the announcement is to update policymakers, businesses, and the public on the current state of the economy, and offer direction for economic policy decisions.
How is a Recession Measured?
The NBER committee focuses on four key indicators to measure activity in the economy:
- Personal income less transfer payments (PILT)
- Employment
- Industrial production
- Price adjustments for wholesale-retail sectors
Let’s look at each of them in detail:
Personal Income Less Transfer Payments (PILT)
One measure of economic activity is personal income less transfer payments (PILT). PILT measures the income that households receive from all sources, including wages, salaries, and investments, but excludes government transfer payments like Social Security and unemployment benefits.
This measure is essential because it reflects the income that households have available to spend on goods and services, which is a key driver of economic growth. When this measure declines consecutively, it is a sign that the economy is in a recession.
Unemployment Rate
One way to determine if the economy is in a recession is by looking at the unemployment rate. A noticeable rise in unemployment could indicate that the economy is facing difficulties.
The Sahm rule is a well-known indicator of recessions, which looks at the three-month moving average of the unemployment rate. According to this rule, there is a high chance of a recession if the three-month moving average of the unemployment rate increases by 0.5 percentage points or more above its lowest point during the past year.
Industrial Production
Industrial production is another important measure of economic activity. This measure tracks the output of the economy’s manufacturing, mining, and utility sectors. It is often used as an indicator of the overall level of economic activity and can be used to forecast future economic growth or contraction.
During a recession, industrial production typically falls as businesses cut back on production in response to lower demand for goods and services. In turn, this decline can result in job losses, reduced consumer spending, and lower economic growth throughout the economy.
Price Adjustments for Wholesale-Retail Sectors
The measure of inflation is crucial for understanding economic activity. It indicates how quickly the prices of goods and services are increasing, which can affect both consumer spending and business investment.
Price changes at the wholesale and retail levels can provide valuable insights into the underlying trends and drivers of inflation. For example, if prices are rising rapidly at the wholesale level, it may indicate that businesses are facing higher costs for raw materials or other inputs, which could lead to higher prices for consumers.
Apart from these, there are a few more indirect factors that point to an impending recession:
- Yield Curve Inversion: When the yield on long-term bonds falls below the yield on short-term bonds, inversion occurs. This is considered a warning sign because it indicates that investors are more willing to lend money to the government over a longer period than a shorter period. This suggests that investors are pessimistic about the economy’s prospects.
- Decline in Economic Activity: This can be measured by looking at several factors, including consumer spending, investment, and factory output. A drop in these areas can signal that the economy is slowing down.
- Gross Domestic Product: A country’s Gross Domestic Product (GDP) is the total value of goods and services produced over a particular period. A decline in GDP over two consecutive quarters is considered a sign of a recession.
It’s important to note that even though these indicators can provide valuable insights into an economy’s health, they cannot be considered foolproof. A recession can occur without warning, and the severity and duration of a recession can vary greatly.
Are We in Recession Right Now?
According to the U.S. Bureau of Economic Analysis, real GDP increased at an annual rate of 1.1% in the first quarter of 2023. Consumer spending witnessed a surge in goods and services, with motor vehicles and parts being the most significant contributor to the increase in goods. On the other hand, health care and food services, and accommodations led to increased services.
Additionally, the unemployment rate has ranged from 3.4 percent to 3.7 percent since March 2022, as reported by the U.S. Bureau of Labor Statistics (BLS) in April 2023.
So according to NBER’s traditional definition of recession, we aren’t in a recession right now. But economists predict that we are moving toward a recession, even as the crucial metrics stay positive.