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How do we know when a recession has begun?


The US economy has contracted for two straight quarters, intensifying fears that the nation is on the cusp of a recession - if not already in one - barely two years after the pandemic recession officially ended.


Six months of contraction is a long-held informal definition of a recession. Yet nothing is simple in the post-pandemic economy. Its direction has confounded Federal Reserve policymakers and many private economists since growth screeched to a halt in March 2020 as COVID-19 struck and 20 million Americans were suddenly thrown out of work.


One sector of the economy that has remained defiantly buoyant is the jobs market. On Friday, the Labor Department said America's hiring boom continued in July as employers added a surprising 528,000 jobs despite raging inflation and rising anxiety about a recession. July's hiring was up from 398,000 in June.

Even as the economy shrank over the first half of this year, employers added 2.7 million jobs - more than in most entire years before the pandemic struck. And the unemployment rate has sunk to 3.5%, near a half-century low. Robust hiring and exceedingly low unemployment aren't consistent with a recession.


While most economists - and Fed Chair Jerome Powell - have said they don't think the economy is in recession, many increasingly expect an economic downturn to begin later this year or next.


Either way, with inflation raging at its highest level in four decades, Americans' purchasing power is eroding. The pain is being felt disproportionately by lower-income and Black and Hispanic households, many of whom are struggling to pay for higher-cost essentials like food, gas and rent. Compounding those pressures, the Fed is jacking up interest rates at the fastest pace since the early 1980s, thereby magnifying borrowing costs for homes and cars and credit card purchases.


As a result, regardless of whether a recession has officially begun, Americans have increasingly soured on the economy.


So how, exactly, do we know when an economy is in recession? Here are some answers to such questions:


WHO DECIDES WHEN A RECESSION HAS STARTED?

Recessions are officially declared by the obscure-sounding National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as "a significant decline in economic activity that is spread across the economy and lasts more than a few months."


The committee considers trends in hiring as a key measure in determining recessions. It also assesses many other data points, including gauges of income, employment, inflation-adjusted spending, retail sales and factory output. It puts heavy weight on jobs and a gauge of inflation-adjusted income that excludes government support payments such as Social Security.


Yet the NBER typically doesn't declare a recession until well after one has begun, sometimes for up to a year. Economists consider a half-point rise in the unemployment rate, averaged over several months, as the most historically reliable sign of a downturn.


DO TWO STRAIGHT QUARTERS OF ECONOMIC CONTRACTION EQUAL A RECESSION?

That's a common rule of thumb, but it isn't an official definition.


Still, in the past, it has been a useful measure. Michael Strain, an economist at the right-leaning American Enterprise Institute, notes that in each of the past 10 times that the economy shrank for two consecutive quarters, a recession has resulted.


Still, even Strain isn't sure we're in recession now. Like many economists, he notes that the underlying drivers of the economy - consumer spending, business investment, home purchases - all grew in the first quarter.


Overall gross domestic product - the broadest measure of the nation's output - declined at a 1.6% annual rate from January through March because of one-off factors, including a sharp jump in imports and a post-holiday season drop in businesses' inventories. Many economist expect that when GDP is revised later this year, the first quarter may even turn out to be positive.



Read more at: https://economictimes.indiatimes.com/news/how-to/how-do-we-know-when-a-recession-has-begun/articleshow/93781913.cms

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