Economists expect the United States of America to enter a recession within the next year, and opinion polls have even found that some Americans believe we are currently in a recession, but regardless of the pessimistic expectations and tense mood among Americans , it may take some time before you actually know what’s going on, whether the economy is in a recession or not.
According to Josh Bivens, director of research at the left-wing Economic Policy Institute, “we know we are in a recession when we are in or are about to leave it.” A jury of eight economists from the National Bureau of Economic Research (NBER) officially announces recessions in the United States and the announcement usually takes about a year, although there is no specific timetable to follow, there are some ground rules such as two quarters of negative GDP However, these are not fixed rules and they are all retrospective, not forward-looking.
Recession fears have increased with the Federal Reserve (the central bank of the United States) raising interest rates to calm consumer demand and tame the fastest rate of inflation in the past four decades, and prices have risen by more than 8% from last year, according to some estimates, making it difficult for Americans to buy basic necessities of food and fuel materials, but many economists agree that the country is not yet in a recession, although there are some worrying signs.
The economy is still quite resilient from several measures: Last June, employers added 372,000 new jobs to the economy, with a slight decline in jobs, but with a total of 11.3 million. of jobs placed on the market, these rates remain well above the pre-pandemic levels. With wages continuing to rise in some sectors and new jobless claims are low, the unemployment rate is 3.6%, which is slightly above the pre-pandemic level, which hit its lowest level in 50 years. .
Wendy Delberg, director of the Hamilton Project at the Brookings Institution, commented on the unemployment rate, saying that “the number is clearly low.” She added: “It has to go down even more so I can worry about the job market.”
Federal officials are hoping to achieve a “soft landing” – weakening demand and reducing inflation – without throwing the labor market into a turbulent state, making it difficult to achieve this balance, because the slowdown in demand usually takes place. it accompanies high unemployment due to declining consumer spending and companies reducing production and employment, according to Tara Sinclair, a professor of economics at George Washington University.
Let’s not forget the difficulty of this great challenge, especially as the Federal Reserve does not have a solid record of soft landings in light of high inflation as it is now and low consumer sentiment at record highs. seeing that they may lose their jobs, their spending will drop dramatically, which will hurt overall economic growth.
So how do we know the recession period prior to the official announcement of the National Economic Research Bureau?
The unofficial definition of a recession is two consecutive quarters of falling GDP, which means that the economy is shrinking rather than growing and the economy contracted in the first quarter of 2022 after a strong period of growth in the last quarter of the year. 2021.
But, even if the next GDP report shows a decline in the second quarter, many economists may not see it as a recession because the job market is still strong. While most of the recessions identified by the National Bureau of Economic Research meet this criterion, some do not; In 2001, for example, GDP decreased in the first quarter, grew in the second, and then fell again in the third.
According to economists, there are many indicators that point to a recession, including consumer spending and consumer sentiment, both of which are key metrics to watch, especially if Americans buy fewer secondary goods, such as sofas or new cars. Some of these metrics suggest the economy may stabilize, consumer spending rose 0.2% in May, retail sales showing slight signs of weakness, and a recent Conference Board survey found consumer confidence it fell to its lowest level since February 2021, but overall consumer spending was relatively strong.
Recessions are also characterized by massive layoffs, accompanied by a significant rise in unemployment, and claims for unemployment benefits become a good measure at the time, according to economists, because the federal government publishes new data weekly and if more people ask for it. unemployment benefits, this is an indication that the labor market is slowing down, but by this standard things don’t look so bad; The labor market is still creating new jobs without an increase in unemployment claims.
Many economists also refer to the Sahm rule, which measures whether the unemployment rate has risen sharply or not. The current nationalist rate of 3.6 percent is as low as last year, so the rule will kick in if the quarterly average increases to 4.1 percent. The rule is attributed to Claudia Sahm, a former Federal Reserve economist, who told us that the United States is not currently in a recession.
There is also a socio-historical aspect to consider: economists point out that black and Latino workers will be the first to bear the heaviest burden and are more likely to lose their jobs. Younger workers, people with lower levels of education and workers with a criminal record; They will be hit hard because employers will take them out first.
“Currently, employers are still looking for workers and hiring people they wouldn’t normally hire,” he added. Sectors sensitive to rate hikes, such as real estate and manufacturing, may also contract more sharply before the effects spread to other sectors.
And it’s not just about firing workers, as job opportunities shrink, it will be difficult for Americans to change jobs if they’re dissatisfied with their careers, a phenomenon that spread during the pandemic in light of high demand for work. It may also be difficult to get a pay raise if employers cut costs, part-time employees may struggle to work longer, and union results may lose momentum. “Families cannot buy what they need to feed their children or keep their apartments,” Sahem said. “Small businesses collapse because there are no customers. The recession changes everything once it starts.”
When are recessions officially announced?
If large segments of Americans lose their jobs and sources of income, formal announcements become secondary for everyone, but you need to understand the process and its stages. The National Bureau of Economic Research committee, known as the Business Cycle Timing Committee, considers a wide range of factors. The group formally defines a recession as “a significant reduction in economic activity across the economy that lasts for more than a few months.”
The committee is usually in no rush to announce the onset of a recession, as there are delays in reporting federal data and it takes time to analyze the numbers, which often go through multiple revisions, making recessions in the middle of a difficult identification.
“It’s not their goal to be speed, nor to declare a recession first,” said Jeffrey Frankel, a former committee member and economics professor at Harvard’s Kennedy School. “The commission’s job is to announce so reliably that we don’t need any review after them,” he added.
The committee announced the start of the latest recession relatively quickly, around four months after the start of February 2020, and the reason could be high unemployment and deteriorating economic situation as well as the exceptional situation of the pandemic. In times like the Great Recession of 2008, it took the committee about a year to announce the start of the recession.
In making its decision, the committee takes into account indicators such as employment levels, GDP, personal income, retail sales and industrial production, and Frankl said most of these indicators look strong at the moment. Some economists have also predicted that if the country goes into recession next year, it could be relatively mild or short-lived, which could delay the announcement. “In economically moderate cases, it’s really hard to know what’s going on,” added Frankl.
There are worrying signs … but a recession is not inevitable
No one really knows whether we are heading into a recession or not, but there is growing concern among economists and professionals, especially in light of the Fed’s recent political moves. Mark Zandi, chief economist at Moody’s Analytics, said he expects a recession of about 40% next year, but he noted some upbeat aspects such as higher employment rates and solid household finances, as Americans accumulated savings during the pandemic. Zandi explained that consumer confidence in the economy has also weakened recently, “but it shows no signs of falling off the precipice.”
Karen Dinan, an economics professor at Harvard University and former chief economist at the Treasury, predicts a recession in the coming months, but said it could be short-lived, as many underlying economic conditions are still strong, and Dinan explained that ” If Recession, I don’t see that we are heading towards a high unemployment rate … it is likely that it will be a short time. “
Fed Chairman Jerome Powell made it clear that the central bank is committed to reducing inflation, even at the risk of an impending recession, to prevent the situation from worsening later. Minutes from a recent Federal Reserve meeting showed central bank officials were concerned that inflation had taken root in the economy, prompting their decision to aggressively raise interest rates.
While some economists believe the Fed will step in quickly and avoid raising interest rates if the job market falls, others are less optimistic.
“Am I sure they will spur the economy to any sign of a recession? I’m not so sure,” commented Josh Bivens, economist at the Economic Policy Institute. “They should do it, but I don’t trust they will,” he added.
* The author of the article; Madeleine Ngo, whose work focuses on issues related to economic policy.
