The economic downturn in which we presently find ourselves has been unusual to say the least. Although growth is slowing, unemployment is extremely low (3.6% in the month of June), a trend we haven’t observed in 12 recessions stemming all the way back to World War II.
The burgeoning job market has produced many vacancies due to a shrinking labor force — as many baby boomers are retiring — and the reporting of record profit margins by companies who are looking to hire more employees.
By the Power of Eight
Most countries define a recession as two consecutive quarters of negative gross domestic product (GDP) readings. But the US government has a very different evaluation process.
The world’s largest economy outsources the job of officially declaring a recession to an obscure group of eight elite economists who always congregate in private and often only communicate over email.
Stanford economist Robert E. Hall currently heads this illustrious non-partisan group of eight, which was first established by Martin Feldstein in 1978.
Notably, the group members don’t believe in the validity of the two-quarter GDP standard for a recession. The National Bureau of Economic Research committee instead looks for:
a significant decline in economic activity that is spread across the economy and that lasts more than a few months.
This includes data on consumer spending, nonfarm payroll employment, and industrial production. On occasion, the committee might take up to a year to decide a recession happened, well after Wall Street has already moved on.
A steep decline in commercial output and the loss of over 22 million jobs prompted the group to declare an exceptionally short-lived recession in 2020.
In the first quarter of 2022, GDP in the United States contracted, although the labor market remains strong. Chief U.S. economist at Bloomberg Anna Wong explains,
Q1’s contraction is mainly due to strong imports (due to strong demand) after slowdown inventory building due to combination of supply bottlenecks and gangbuster inventory building in Q4 last year. It’s hard to interpret that as a weakness-driven contraction.
Riding the Wave of Inflation
Given the extremely low unemployment rate, Harvard economics professor Nicholas Gregory Mankiw posits that if a recession really does arrive, it would likely be provoked by the Federal Reserve’s interest rate hikes. Mankiw argues that a temporary economic downturn may be required to control inflation.
Meanwhile, a record number of Americans — 426,000 as of June 2022 — now work two full-time jobs just to keep pace with rising costs. Those who work in hospitality and service jobs and spend more on essentials like gasoline have been hit the hardest.
Central banks across Asia, Europe, and the Americas are joining the Fed in aggressively hiking interest rates in an effort to curb the rapid surge in prices that has affected nearly every part of the global economy.
These rate increases can’t contain soaring energy prices but do stand to slow consumer demand and let supply catch up. Are we headed down the path towards a recession? The Magic 8 Ball says, “Watch and wait.”