Are We in a Recession? What to Know
As stocks continue to disappoint and recession predictions come out daily, investors may be asking, “Are we in a recession?” Before answering that question, you may want to brush up on what a recession is exactly. Many folks are under the impression that a recession is simply two straight quarters of negative real GDP (Gross Domestic Product) in the U.S. Though, officially, a recession is not that easily defined.
The official dating of recessions in the U.S. are decided by a panel of experts at the National Bureau of Economic Research (NBER). Even their definition is a bit vague. For instance, the NBER website says a recession is:
“A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.”
Every recession is different from the others. But the factors listed by NBER’s recession definition cover the main underlying factors that most recessions drive. In addition, NBER’s definition allows for the interpretation of other factors that may be specific to each recession.
Today, some of NBER’s main factors look good, and some do not. It’s worth noting that the factors need to see significant declines. Let’s take a closer look at each factor.
Are We in a Recession in 2022?
The NBER’s definition of a recession covers many factors. Though each factor is considered as a whole when NBER’s panel dates a recession, we can dive into each. Remember, the factors should significantly decline over a few months.
No. 5 Real GDP
The ‘Real’ in Real GDP refers to adjustments for inflation. For instance, if nominal (not adjusted for inflation) GDP is 10% and inflation is 2% during a quarter, Real GDP is 8% (10% minus 2%). Real GDP for the fourth quarter of 2021 was 6.9%. During the first quarter of 2022, the U.S. saw its Real GDP fall to a negative 1.4%.
That may seem like a significant decline, but it is up to NBER’s panel to decide. Also, quarterly Real GDP covers three months, which the panel may not consider more than a few months. Though if the second-quarter Real GDP is also negative, it is more likely to fit NBER’s timeframe.
No. 4 Real Income
Though personal income rose in the first quarter, record-high inflation took a big bight out of Real Income. In the first quarter, real income rose 8%. A rise in real income is a good thing at face value. Unfortunately, it significantly declined from the fourth quarter of 2021, when real income was 6.3%.
No. 3 Employment
The job market in the U.S. has been a strong point for the economy. Employment has been growing steadily for nearly a year. Though the employment rate has been flat for the last few months, there has been no decline. NBER’s recession-dating panel will not likely point to employment as a cause of a recession.
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Is the U.S. in a Recession?
Many of the main economic factors the NBER panel considers may not signal a recession though some do. For instance, real GDP and real income show signs of weakness. Those two factors are both adjusted for inflation. Inflation in the U.S. throughout 2022 has been at higher levels than we’ve seen in decades.
A drastic increase in oil prices has brought much inflation in the U.S. and abroad. Since oil is used to make gas we use in our cars, folks are paying top dollar at the pump. On the same token other commodities like natural gas are also at record highs. Families use natural gas to heat their homes and cook meals. Oil and gas are also used heavily by companies around the globe as an energy source to make their products.
The skyrocketing oil and gas prices came after the conflict between Russia and Ukraine escalated. Russia is one of the world’s largest oil and natural gas exporters. In a move to discourage further military action from Russia, countries around the globe have sanctioned Russian oil and gas.
The sanctions included eliminating or significantly reducing purchases of Russian oil and gas. In anticipation of a drastic drop in the world’s oil and gas supply, prices rose sharply. Since oil and gas are still in high demand, countries are dealing with inflation worldwide.
The Federal Reserve has moved to raise interest rates to cool a red-hot U.S. economy that boomed in 2021. After looking at NBER’s recession factors, it seems like the Fed has made progress in its goal. Unfortunately, increasing interest rates may not remedy high oil and gas prices. If inflation remains high, a recession in the U.S. may be around the corner.
