Is A Recession Looming?
It must be really tough to be an economist right now. Ordinarily the data that feeds into their economic models is consistent enough to enable them to forecast economic downturns with better than 50% accuracy (although they almost never get the timing or the severity right). Today, though, it’s a different story. Economists are flatly unable to agree on whether or not a recession is on the horizon.
On the negative side, measures considered to be economic leading indicators are declining. They include retail sales, housing starts, consumer confidence, and of course the stock market, which has just completed its worst half-year performance in over fifty years. Then there’s the Treasury bond yield curve – which has just inverted – that many view as a recession harbinger, although I do not share that belief (see https://www.cognizantwealth.com/2022/04/21/why-the-yield-curve-does-not-predict-a-market-downturn/).
Those who believe the recession risk is low point to the continued strength in the job market, with 372,000 jobs added in June and an unemployment rate that remains at a historically low 3.6%. In addition, more workers are leaving their current jobs for better ones than at any time over the last decade.
However, the jobs data itself is conflicting. The Bureau of Labor Statistics uses two data points. One is a survey of payroll numbers from employers, and the other is a survey of households. According to Paul Krugman, an economist at the New York Times, the household data indicates a much bigger slowdown than the employer data.
Perhaps the biggest source of confusion is the government’s own definition of recession. You might think it is two successive quarters of negative real GDP, “real” meaning above inflation. With inflation spiking right now, the Q1 estimate came in at negative 1.6%, and the second quarter is likely to be worse. But the committee of economists at the National Bureau of Economics (NBER) that makes the call defines recession as a significant decline in economic activity that is spread across the economy, and considers factors in addition to GDP. That’s why the economic downturn when Covid first struck, as well as the one in 2001, were both labeled as recessions even though both lasted less than six months.
Some economists are sounding the alarm about a possible recurrence of what was called “stagflation” in the 1970s. That was a period of high inflation with stagnant economic growth. But the environment that produced it was very different from that of today. There are also related fears of an accelerated “wage-price spiral,” where a tight labor market forces wages up, which drives prices up, and so on. But wage growth has actually been declining, making this scenario less likely.
If the Fed’s attempt to mitigate inflation while avoiding slowing job growth – what economists call a soft landing – is successful, perhaps we won’t experience a recession. Then again, nobody knows. But does it really matter to us as individuals? If your investment strategy is sound it should be relatively recession-proof. And if your job is not impacted by a recession then you should be fine. In either case it’s not something over which you have control. So perhaps we should leave recession-watching to where it belongs, as an academic exercise for economists, not as one more thing for us to worry about.