Alphacast Highlight: Is the United States in a recession?
Alphacast Highlight: Is the United States in a recession?
By Maia Mindel (mmindel@alphacast.io)
Read more Alphacast Highlights here
Given the recent financial turmoil, as well as the high interest rates that have been growing rapidly for a year, the question in most observer's minds is whether or not the US economy will enter a recession, or if it is already in one. Unlike most countries, which define a recession as two consecutive quarters of negative GDP growth, the United States utilizes a different definition - one provided by the NBER Business Cycle Dating Committee, which determines the business cycle peaks (and troughs) based on a series of 11 indicators. You can follow those, as well as the unemployment rate (utilized, though not directly, by NBER) in this dashboard.
The three main areas of concern are the labor market (employment and unemployment), personal income and spending, and national accounts.
Regarding the labor market, the outlook is strongly postive - unemployment (seen inverted in the above chart) has remained at the near-record low pre-recession levels for a year now, while employment and payrolls have mounted a significant recovery. Other measures, like unemployment insurance claims, have not surpassed pre-2020 levels meaningfully. The strength of the labor market, in fact, is such that the Federal Reserve considers it a major driver of underlying inflationary pressures (due to elevated wage growth and elevated job switching), and normalizing its key indicators is one of the major goals of the current interest rate push. It should be noted that it is a commonly observed pattern that employment peaks after output, meaning that once significant declines in employment occur, a recession will already be visible in other indicators on this list.
A second factor considered a key driver of inflationary pressures is excess spending over 2021, especially in durable goods that were (and might still be) vulnerable to supply chain bottlenecks or COVID related disruptions. Real consumption and real sales remain significantly above their pre-pandemic levels. though they seem to be converging towards their pre-pandemic trendlines to some extent. Income, meanwhile, has lagged behind, with a particularly interesting dynamic within it: the wages of the lowest-paid workers have grown fastest, while the most highly skilled segments of the workforce have seen earnings fall versus inflation. Price growth has cooled somewhat in the past few months, allowing for a respite from the crunch higher prices have caused in families' budgets. Excess savings from the pandemic remain large, as lower expenditures on leisure, government transfers, and a red-hot labor market resulted in a financial cushion being built up and not completely exhausted by the present. Higher interest rates aim to have families capitalize on it rather than spending it down, but it is unclear how successful this effort has been.
The last aspect of the economy to look at is output and national accounts. Industrial production has seen a slower recovery, and saw a worrying decline in late 2022, but recent data does not point to industry being in a recession - or to this recession spreading to the overall economy. It is more likely that this responds to sector-specific pressures, especially in a complex global envirnonment. Meanwhile, traditional measures of output like GDP show a moderate slowdown in mid-2022, but not later in the year; this might point to supply-specific factors such as energy, since it was too early for this "pause" to reflect interest rate effects. The mid-year slowdown, decomposed, seems to reflect mostly a hike in imports, though later growth prints show a clear decline in investment - the main channel through which interest rates affect demand. Gross Domestic Income and Output, which reflect the income side of the economy, have also not shown many signs of slowing down - the difference between the two and GDP does not seem extraordinary by historical standards, meaning that the income and spending dynamics mentioned above still apply.
Overall, the state of the US economy does not seem to be one of recession - the labor market has remained strong a year into the Fed's rate hike campaign, personal income and spending measures are, if anything, still too high, and output and national accounts data does not seem to be suffering from a tighter financial environment. Clearly, this data does not reflect new economic developments, especially in the financial sector - and the well-known lags that monetary policy has to act means that the bulk of the downwards push from rate hikes will be seen throughout the year, even if they stop soon. The latest hike, of 25bp. (versus previous 75bp. and 50bp.) points to a softening of future actions, and the Fed's terminal rate projections are usually between the current rate of 5% and 5.5%. The inflation situation is complex, but all signs seem to indicate that further rate hikes are not on the agenda, signifying that a full-blown recession might be unlikely - though a further, perhaps significant, softening of the relevant variables is necessary for price growth to be reigned in.
