Are We In A Recession Yet?

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Since at least mid-2022, politicians, economists and market professionals have been engaged in a great semantic debate over whether the U.S. economy is headed for recession or not.

The argument, invariably influenced by politics, came down to how you defined the word recession.

According to a general definition of recession—two consecutive quarters of negative gross domestic product (GDP)—the U.S. entered into a recession in the summer of 2022.

The organization that defines U.S. business cycles, the National Bureau of Economic Research (NBER), takes a different view. According to the NBER’s definition of recession—a significant decline in economic activity that is spread across the economy and that lasts more than a few months—we were not in a recession in the summer of 2022.

“We have a hard time believing the economy is in recession today, given a strong labor market and corporate earnings growth,” said Tim Holland, chief investment officer at Orion Advisor Solutions. “We also remind ourselves that recessions are uncommon, as our economy was in recession just 8% of the time over the past 30 years.”

Nevertheless, a recession may still arrive at some point soon.

The Federal Reserve is determined to raise interest rates until inflation starts to moderate from its current levels. That could cause the economy to decline in a manner that no one, much less the NBER, could argue isn’t a recession.

To keep tabs of whether an official recession is imminent, we’ve devised the following recession tracker, which monitors 15 important economic indicators. Once most of the signs point downward, a recession is nigh.

Economic Data

Gross Domestic Product (GDP)

  • Most Recent Report: Q4 GDP +2.9% (advance reading)
  • Grade: Good

The second reading of U.S. gross domestic product (GDP) showed the U.S. economy grew at an annualized rate of 2.9% in the final quarter of 2022. This was after 3.2% GDP annualized growth in the third quarter, which led to overall GDP growth of 2.1% for the year. Obviously, if a recession is measured as two consecutive quarters of negative GDP growth, these numbers move the U.S. farther away from that ledge.

“The economy grew decently in 2022, and the fears of a recession underway in the first half of last year were misplaced,” said Bill Adams, chief economist for Comerica Bank. “However, the picture is different looking forward,” Adams added.

In Adams’ opinion, other numbers—such as unemployment claims, manufacturing surveys and the yield curve—indicate the U.S. may rapidly be approaching the recession we’ve been staving off for the better part of a year.

Consumer Price Index (CPI)

  • Most Recent Report: December CPI +6.5%
  • Grade: Bad

Inflation has moderated from its June high of 9.1%. December’s CPI reading of 6.5% was down from November’s 7.1% year-over-year level. Nevertheless, inflation remains well above the Fed’s 2% to 3% target rate, and that’s having a profound effect on the purchasing power of the average American.

“[The] weakened consumer price index will get us closer to the point where the Fed funds rate and inflation rate are in equilibrium, which is typically the time when Fed policy can cease being restrictive,” said James Demmert, chief investment officer at Main Street Research.

The picture is even brighter if you look at the Fed’s preferred inflation gauge, the core personal consumption expenditures price index (PCE), which strips out volatile food and energy prices. In December, core PCE showed prices grew at a rate of 4.4%.

ISM Manufacturing Index

  • Most Recent Report: December ISM Manufacturing 48.4
  • Grade: Bad

Not long ago, this survey of corporate executives in industrial companies had come back positive each month for more than two years. But after more than two years of expansion, December turned out to be the second month in a row that the ISM manufacturing index contracted thanks to softer demand and slowing output.

The Institute of Supply Management’s (ISM) purchasing managers index is a survey of purchasing and supply executives in over 400 industrial companies throughout the U.S. This month’s respondents didn’t view all indicators as negative. Consumer demand may have trailed off, but it remained high, offering a positive outlook for the year ahead.

Industrial Production

  • Most Recent Report: December Industrial Production +1.6%
  • Grade: Neutral

According to the Federal Reserve, industrial production in December was up 1.6% from a year earlier. However, it was down 0.7% since the previous month.

“Production fell in the month and orders increased, but output expectations rose,” said Adams. He added, “Output per hour was likely flat, since high-productivity industries like manufacturing and construction were weaker than low-productivity industries last quarter.”

This provides a mixed signal for the overall economy. The manufacturing outlook might appear rosier than it did a year ago, but we aren’t out of the woods yet.

Retail Sales

  • Most Recent Report: December Retail Sales -1.1%
  • Grade: Bad

Advance estimates on December retail sales were up 6.0% year-over-year but down 1.1% since November. As far as the overall economy goes, experts didn’t see the positive year-over-year data as much of a boon.

“A clutch of economic data releases, including the highly anticipated retail sales numbers, indicate that the economy is finally slowing more broadly, and that the all-important consumer is becoming increasingly careful about spending,” said Quincy Krosby, chief global strategist for LPL Financial.

Conference Board Leading Indicators

  • Most Recent Report: December Leading Indicators -1.0%
  • Grade: Bad

The Conference Board’s leading index dropped by 1.0% in December. This means the latter half of 2022 saw an even steeper decline than the previous six month period. Unfortunately, this could be the most glaring signal that the U.S. economy could be heading for a recession.

Adams said, “[T]he Conference Board’s Leading Economic Index has been pointing to a recession ahead for a few months,” said Adams. “The index fell 8.2% at an annualized pace over the last six months, a rate of decline that is typical of those seen at the onset of a recession.”

Markets Data

The Stock Market (S&P 500)

  • YTD Performance: +6.1% as of Feb 1
  • Grade: Neutral

Thus far, the new year has brought investors a rally in the S&P 500. Not only is the index up 5.4% year-to-date, it’s bounced more than 12% since the most recent market bottom on October 12. However, the bear market is most likely far from over.

We yet to approach the S&P’s highs from around one year ago, said David Bahnsen, chief investment officer at The Bahnsen Group. “If the market bottomed on October 12, 2022, it will be one of the highest valuation troughs in history, as the S&P 500 was trading at about 17x earnings at that time, and bear market bottom multiples are historically much lower than that.”

Treasury Yield Curve

  • 10-year / 2-year Spread: -0.66%, as of January 24
  • Grade: Bad

When short-term interest rates yield more than longer-term rates, it’s called an inverted yield curve. This is typically a tell-tale sign of an impending recession, as the market believes longer-term growth will be weak.

The yield curve has been inverted since early July, and it’s now reached levels not seen in more than 40 years.

The Jobs Market

Unemployment Rate

  • Most Recent Report: January Unemployment 3.4%
  • Grade: Good

Despite wobbliness throughout the economy and concerns about a further slowdown in the months to come, the U.S. labor market remains robust. The unemployment rate has returned to its pre-pandemic levels and is even a few points lower than it was at this time last year.

In fact, employers added 517,000 nonfarm jobs in January, demolishing the consensus forecast of 188,000 new jobs.

“The labor market was very tight at the end of 2022 with the unemployment rate revisiting a half-century low; the Fed wants a more normal unemployment rate to prevent wage-price spiral inflationary pressures from taking root in the economy,” said Adams.

Initial Jobless Claims

  • Most Recent Report: January 19th Initial Claims 183,000
  • Grade: Good

The initial jobless claims numbers are released on a weekly basis, and provide a look at how many people have begun filing for unemployment. Rising initial claims suggest more people are losing their jobs and claiming unemployment checks.

Right now, the level of initial jobless claims look pretty strong, at a nine-month low in the final week of January. Compare this figure to more than 200,000 at the end of December, which had been a relatively consistent level throughout 2022.

Job Openings and Labor Turnover Survey (JOLTS)

  • Most Recent Report: December JOLTS 11 million
  • Grade: Good

Even as the unemployment rate remains low, the total number of available jobs, though lower than this time last year, is still significantly higher than pre-pandemic levels. There were roughly 7 million job openings in January 2020, compared to 11 million now.

However, there were almost one million more job openings a mere six months ago, meaning demand for workers has come down somewhat. While the labor market is still tight overall, market participants are keeping a close eye on the trend.

A weaker jobs picture may cause the Fed to adopt a less hawkish monetary policy, which could bring the economy in for a softer landing.

Confidence Metrics

University of Michigan Consumer Confidence Survey

  • Most Recent Report: January Consumer Confidence 64.6
  • Grade: Good

Consumer sentiment ticked up in January, rising by more than 8% compared to the month before, according to the University of Michigan Survey of Consumers. This is a positive development for an index that has been on a consistent downward trajectory since the start of the pandemic.

“Sentiment rose to 64.6, the highest since April 2022 as consumer attitudes improved from weakening inflation pressures,” Jeffrey Roach, chief economist for LPL Financial, said. “Inflation expectations are well-anchored and improving as pricing pressures are weakening across many sectors,” Roach added.

However, even if inflation fears are easing, consumer sentiment is still down almost 4% year-over-year, meaning there’s room to recover.

NFIB Small Business Optimism Index

  • Most Recent Report: December NFIB 89.8
  • Grade: Bad

Business owners aren’t feeling the same inflation relief as many consumers. For 12 consecutive months, the National Federation of Independent Business (NFIB) Small Business Optimism Index has been below the 49-year of average of 98 points. Not to mention, the index fell an additional 2.1 points month-over-month in December alone.

Even worse, small business owners’ expectations for better business conditions six months from now fell eight points month-over-month to -51%. According to NFIB, small businesses account for about 40% of GDP and employment.

In his commentary on the December report, Bill Dunkelberg, chief economist at NFIB, said, “Overall, small business owners are not optimistic about 2023 as sales and business conditions are expected to deteriorate.”


Housing Starts

  • Most Recent Report: December Housing Starts -1.4%
  • Grade: Bad

December saw the number of privately-owned housing starts clock in at 1,330,000. This was 1.6% below November’s rate and nearly 30% below the number of starts from a year earlier.

These numbers have led some experts to point out that we may not be at the start of a “housing recession” yet, but we are certainly in the midst of a housing contraction, following years of uncharacteristic growth in the housing market.

NAHB Home Builders Index

  • Most Recent Report: January NAHB 35
  • Grade: Bad

The NAHB Home Builders Index crept up four points in the month of January, from 31 in December to 35 now. This staunched a steady series of declines throughout 2022. However, the index is still down almost 50 points from January 2022.

Simply put, U.S. home builders are not optimistic.

What Is the Recession Tracker Telling Us?

The 15 data points in the Forbes Advisor recession tracker had the following grades:

  • Good: 5
  • Neutral: 2
  • Bad: 8

The economy may not officially be in a recession, but it’s not looking great. Just keep in mind that not every data point we rank above would be weighted equally in deciding whether the U.S. is in recession.

The strongest parts of the economy are concentrated in the labor market, thanks to low unemployment and the large number of unfilled jobs.

Meanwhile, consumers seem to be enduring high inflation better than they did in 2022, and hopefully prices will continue to moderate in the months to come.

Parts of the economy that are susceptible to higher borrowing costs, particularly the housing market, have not fared well at all.

How Does the NBER Define a Recession?

Despite negative economic developments throughout 2022, the NBER is not ready to say that the current economic expansion is over. That’s perfectly fair, especially since GDP has been on an upward trajectory for the past two quarters and employers are still adding workers at an impressive clip.

The NBER is looking for a big drop in economic activity across the economy, not just in a few sections, and the labor market is a glaring outlier. Moreover, the decline generally needs to last more than a few months.

A big exception, of course, was the recent Covid Recession, which lasted just two months. But that decline was so severe, and so widespread, that the NBER had to be flexible with its definitions.

Generally speaking, though, the NBER will want to see each of its three criteria for decline–depth, diffusion and duration–met before it’ll make a call.

What Metrics Does the NBER Consider for Recessions?

The NBER is vague about which exact economic indicators it considers, since it wants wiggle room to determine recession calls.

It typically considers items like, “real personal income less transfers (PILT), nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, employment as measured by the household survey, and industrial production,” per its website.

However, it doesn’t assign a particular weight to any indicator.

A recession is a change of direction in economic activity, according to the NBER. Determining how and when that change occurs is a little bit art and science.

When Was the Last Recession?

The last recession, according to the NBER, took place between February 2020 and April 2020.

That means the economy was already expanding again by May 2020, thanks to some state governments loosening restrictions and unprecedented direct payments and unemployment insurance helping consumers make-do.

Before that, the economy had last contracted between December 2007 and June 2009, which is otherwise known as the Great Recession. While that recession wasn’t as severe as the Covid Recession, it did last longer.

The expansion between the Great Recession and the Covid Recession is the longest business expansion in U.S. history going back to 1854.