With real GDP falling in the first quarter of 2022, analysts and economists have been bandying about the term “recession” on a much more frequent basis, but digging into the data shows a much more muddled and less certain forecast. Nationwide’s Economic & Financial Markets Monthly Review dove into the metrics that the National Bureau of Economic Research uses to determine if the economy is officially in a recession, and what the data may indicate in the near-term.
Image source: Nationwide’s Economic & Financial Markets Monthly Review
Reports for June came in mixed, with inflation even higher than expectations at 9.1% while on the flip side non-farm payrolls grew by more than double their long-term median. Some downwards revisions to previous job reports meant that job gains actually trended lower than the June indicator, but job increases are still “remarkably strong for any period, but especially for one with the labor market as tight as this one is,” Nationwide wrote.
Real GDP fell 1.6% in the first quarter on an annualized basis, with expectations of another drop in the second quarter, but consecutive drops do not always spell disaster and recession.
The National Bureau of Economic Research’s private economists are the ones that officially determine recession, but they don’t rely on the standard definition of consecutive quarters of falling GDP to label the economy as a recessionary one. The metrics that the Conference Board does look at include payroll employment, personal income minus transfer payments, industrial production, and sales for manufacturing and trade.
“Data through May continued to trend higher, climbing to an all-time high and up by 3.0 percent from a year earlier. No sign that the economy fell into recession in the first half of the year here,” explained Nationwide.
Manufacturing and trade are measured by the ISM manufacturing, services, and composite indexes, with 50 as the threshold for expansion or contraction. The indexes have fallen recently but still sit “comfortably above” the threshold and well within expansion bounds.
The American Staffing Association, Manpower, and Challenger have all reported strong job demand in recent employment surveys.
Sentiment Often Correlates When It Comes to Recession
The hard data, for now, isn’t indicating that the U.S. is currently in recession, but consumer sentiments are waving all the red flags from shore that we might be headed off the deep end at some point soon.
Image source: Nationwide’s Economic & Financial Markets Monthly Review
The University of Michigan’s consumer sentiment index has long been a barometer of how the general population feels, measured by how they’re spending. Historically, it has shown a strong correlation to recession when it falls, and it’s currently near record lows. Alongside that index is the National Federation of Independent Businesses’ small business optimism index which is also currently sitting at its lowest since 2013.
“Recession fears were on the climb throughout the first half of the year, as supply chain problems held growth back and pushed inflation higher, while the Federal Reserve responded with a series of increasingly aggressive rate hikes. Although we don’t believe that the economy has slipped into recession yet, nor is it likely to do so in the near term, there are increasing danger signs for 2023 and 2024 as the Fed continues to fight inflation by tightening monetary policy,” Nationwide predicted.
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