There’s one topic that seems to be on everybody’s mind these days. In news headlines, on the radio, on social media, everyone’s asking: Is the U.S. in a recession? And if a recession hasn’t hit yet, how long before it does?
As it turns out, that’s not a simple question to answer. There are many different indicators economists look at to determine when the economy is going into a downturn. And right now, all those indicators are telling different stories.
Are We in a Recession?
Economists don’t all agree on the best way to define a recession. One common definition of a recession is two consecutive quarters of decline in gross domestic product, or GDP. That’s a measure of the total value of everything the economy produces in a year.
According to this definition, the U.S. economy is in an economic downturn already. In the second quarter of 2022, real GDP fell by 0.9%. That came on top of a 1.6% drop in the first quarter, making two quarters of falling GDP in a row.
But in the U.S., it’s up to the National Bureau of Economic Research (NBER) to declare when a recession is officially in progress. And its definition is a bit more complicated.
What the National Bureau of Economic Research Says
The NBER looks at several indicators besides GDP to determine whether the U.S. is in a recession. These include employment, industrial production, and wholesale-retail sales. And right now, most of these measures are much healthier than GDP.
Figures that suggest the economy is still strong include:
- Job Growth. In the second quarter of 2022, the labor market added about 375,000 jobs per month. That’s far higher than it normally is at the start of a recession. For instance, at the end of 2007, right as the Great Recession started, the economy was adding less than 100,000 jobs per month.
- Unemployment. The unemployment rate is also low right now. As of June, it stood at 3.6%. That’s close to the lowest it’s been since the 1950s.
- Personal Income. Personal income rose in early 2022. At the start of May, it was about 4% higher than it had been at the start of the COVID-19 pandemic, according to the Bureau of Economic Analysis. That’s true even with inflation factored in.
- Consumer Spending. Overall consumer spending rose from January through May. However, the rise in spending has slowed since the start of the year. In fact, when adjusted for inflation, spending actually fell a bit in May.
- Industrial Production. According to the Federal Reserve, U.S. industrial production grew by about 4% between June 2021 and June 2022. It’s currently higher than it was in 2017 and much higher than it was early in the pandemic.
For all these reasons, the NBER has not officially declared a recession as of August 2022.
What Other Economists and Investors Are Saying
Most economists agree with the NBER that the U.S. economy is still doing OK. They see signs that the economy is weakening, but they think it’s too soon to call a recession. But there are a few who disagree.
One of these is Kevin Hasset. He led the National Council of Economic Advisors under the Trump Administration and is now at the Hoover Institution. In late July 2022, Hasset said on CNBC’s “Squawk Box” that the U.S. is “kind of in a recession.”
Hasset pointed out that since World War II, every time the GDP declined for two quarters in a row, there was a recession. He also noted that while the unemployment rate is still low, unemployment claims are rising, just as they normally do at the start of a recession. Thus, he argued, the labor market currently reflects what you’d see in “a normal recession.”
Another expert who says a recession has already begun is Cathie Wood, CEO of Ark Invest. In a late July 2022 interview on CNBC’s “The Tech Trade,” she said the main sign of this was “excess inventories” at stores and other businesses. This indicates that consumers aren’t buying as much..
Wood also noted declines in the prices of gold and copper. Since many people buy these precious metals as an inflation hedge, she claimed this means that inflation will soon drop sharply. In fact, she argued that we may soon be facing deflation.
Investment strategist David Dillian is also in the pro-recession camp. In a Washington Post editorial, he notes that the stocks of most retail businesses are falling. However, there’s one notable exception: discount stores such as Dollar Tree and Dollar General.
This is a sign that American consumers are in bargain-hunting mode. They’re feeling squeezed as inflation drives up prices and wages aren’t keeping pace. He says many Americans are dipping into emergency savings, driving the personal savings rate to its lowest level since 2009.
What Is Officially a Recession?
The NBER’s official definition of a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months.”
It goes on to say that a recession creates visible change in five areas: real GDP, real income, employment, industrial production, and wholesale-retail sales. The NBER doesn’t declare a recession unless all these indicators fall steadily for more than a couple of months.
This definition is flexible. It allows the NBER to declare a recession in situations like the start of the COVID-19 pandemic, when the entire economy went into a steep but brief decline. Under the “two quarters of falling GDP” definition, that would not have been considered a recession.
However, this definition is also complicated. It’s not as straightforward as looking at the gross domestic product for the past two quarters. This can make calling a recession as much an art as a science, which is why economists don’t always agree on when one has started.
Signs a Recession Is Coming
Although most economists don’t think the U.S. is in a recession now, many think it’s likely that one is coming soon. They note that we’re already seeing several warning signs of a recession:
- High Inflation. As of June 2022, the consumer price index was up 9.1% over the past year. However, incomes aren’t keeping pace with rising prices, and so consumer spending isn’t either.
- Rising Interest Rates. To tame inflation, the Federal Reserve has been raising interest rates. These interest rate hikes will make it harder to borrow, reducing consumer spending. This will bring inflation down, but if the Fed goes too far, it could push the economy into a slowdown.
- Unemployment Claims. The overall unemployment rate remains low. But claims for unemployment insurance are rising slightly, an early sign that layoffs are on the rise.
- Low Consumer Confidence. Consumers don’t feel positive about the economy. In June, the University of Michigan’s Index of Consumer Sentiment fell to 50, a record low. The Conference Board’s Index of Consumer Sentiment has also fallen sharply in 2022.
- Housing. The overheated housing market is starting to cool. Demand for homes is leveling off, and fewer new homes are being built. Rising interest rates could accelerate this trend by making mortgages more costly.
- Stock Prices. The stock market has seen huge declines in 2022. Falling stock prices don’t always signal a recession, but they can be a sign investors are feeling uncertain about the economy. And between the pandemic, inflation, the war in Ukraine, and the worsening effects of climate change, they have a lot to be uncertain about right now.
What You Can Do Now
Even if we’re not in a recession yet, it’s clear that the U.S. economy isn’t as strong as it was just a few months ago. So even if we manage to avoid an official recession, we may be in for a period of belt-tightening.
The good news is, there are several ways to prepare for a recession. With these steps, you can improve your chances of making it through unscathed.
- Build Emergency Savings. It’s easier to ride out a recession with plenty of money in the bank. Ideally, your emergency fund should have enough to cover your living expenses for three to six months.
- Trim Expenses. If you’re already living paycheck to paycheck, you’ll be in real trouble if that paycheck gets cut or disappears. To add some wiggle room to your budget, look for ways to trim all your expenses — from grocery costs to utilities.
- Add Income Streams. The more sources of income you have, the less you need to fear from having your pay or work hours cut. Consider getting a side gig or starting a side business that can help support you if your paycheck takes a hit.
- Diversify Your Investments. Stock prices typically take a dive in a recession. To protect your assets, diversify your portfolio. Keep some money in other assets such as bonds, which tend to go up when stocks go down. But also leave some in stocks so you don’t miss out on big gains when the recovery starts.
- Boost Your Credit Score. It’s always hard to borrow money during a recession. However, it’s easier if you have good credit. To protect your access to loans, boost your credit now by paying down balances and avoiding late payments.
- Pay Down Debt. Debt payments create dead weight in your budget — weight that’s even heavier when times are tight. By lightening your debt load now, you can free up extra cash to help you get through the downturn.
- Get Job Training. The biggest hazard of a recession is the risk of job loss. You can boost your odds of surviving layoffs — or of finding a new job if you need one — by improving your job skills. Seek out training to learn new skills or gain certifications that look good on your résumé.
Recessions are like rainy days: there will always be another one eventually. You can’t stop the rain from coming, but you can protect yourself by carrying an umbrella.
In financial terms, this means strengthening your employability to improve your career prospects. It means developing backup sources of income to help you ride out a rough patch. And it means having plenty of emergency savings to fall back on if you need them.
If it turns out that we’re already in a recession, your financial umbrella will help you get through it in comfort. And if not, you’ll have it ready to go when you need it.