Recessions: Know What’s What

Volatile components present few indications about subsequent growth

Insider

Contributing Writer

As we move through 2024, the economy is doing OK. Certainly, if one “tortures” the data enough, one can find issues with the economy. At some point, those predicting a recession will be right, just as those predicting an economic expansion will eventually be correct.

But, don’t forget that during the pandemic, and after, the government handed out money. And since inflation is too much money chasing too few goods, when money lessens, so will inflation . . . and so will economic expansion, in theory.

Economies function in cycles, regardless of administration or foreign policy. The “old” definition of a recession being two quarters of negative GDP, while simple and easy to understand, is stale and not accurate. An inverted yield curve does not always predict a recession, as we’ve noticed for the last several months.

The Federal Open Market Committee, which is the “action arm” for many Federal Reserve activities, as well as various Fed Presidents, including Fed Chair Powell, continue to talk about inflation. It remains too strong for the Fed’s liking, and the Gross Domestic Product numbers and other measures hardly point to a slowing economy.

Volatile components present few indications about subsequent growth and the Fed thinks that there is significant underlying momentum in the domestic economy due to advances in household spending and business fixed investment, combined with the further tightening of labor market conditions. Fiscal policy is intended to act as a natural drag on the economy. At the same time, the supply chain issues were worked out, and a few members noted that there were signs that the pandemic-related strains on labor supply were easing.

The Real Decider

While the Fed garners headlines, there is another organization that one should be aware of when talk of a recession comes up. The National Bureau of Economic Research (NBER) is responsible for determining when a recession begins and when it ends. More specifically, it is the Business Cycle Dating Committee within the NBER that decides.

Forget “a recession occurs any time you have two consecutive quarters of negative Gross Domestic Product (GDP) growth.” According to the NBER, “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators like real GDP, industrial production, and wholesale-retail sales. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.”

The NBER looks at multiple factors when determining whether the United States economy is in a recession, with domestic production and employment as “the primary conceptual measures of economic activity.” Thus, the Business Cycle Dating Committee emphasizes economy-wide indicators of economic activity, and says “the two most reliable comprehensive estimates of aggregate domestic production are normally the quarterly estimate of real Gross Domestic Product and the quarterly estimate of real Gross Domestic Income, both produced by the Bureau of Economic Analysis.”

Looking at employment, for example, NBER’s Business Cycle Dating Committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment.

Recall that the NBER officially declared an end to the economic expansion in February of 2020 as the U.S. fell into a recession amid the coronavirus pandemic. According to the NBER, the recession was the shortest on record ending only two months later in April 2020.

Loan officers should know that recessions mean lower rates but a tougher time qualifying borrowers, and there is no single way to predict how and when a recession will occur.

What To Know

Loan officers should know that a) recessions mean lower rates, but a tougher time qualifying borrowers, and b) there is no single way to predict how and when a recession will occur since economists assess several metrics to determine whether a recession is imminent or is already taking place.

NBER aside, according to many economists, there are some generally accepted predictors that, when they occur together, may point to a possible recession. Leading economic indicators (the ISM Purchasing Managers Index, the Conference Board Leading Economic Index, and the OECD Composite Leading Indicator) are watched, as is the Treasury yield curve.

Officially published data series from various government agencies that represent key sectors of the economy, such as housing stats and capital goods new orders data published by the U.S. Census, are also monitored. Changes in these data may slightly lead or move simultaneously with the onset of recession, partly because they are used to calculate the components of GDP, which will ultimately be used to define when a recession begins.

Last are lagging indicators that can be used to confirm an economy’s shift into recession after it has begun, such as a rise in unemployment rates.

Conflict arises between objective and subjective measures, though. Investors’ and consumers’ feelings play a critical role in perceptions of economic health. If you lost your job or feel that the economy is slowing down, then we’re in a recession, right? Not necessarily, and therein lies the difficulty of saying a recession has started or not, be that in the spring of 2024, or any time.