On Thursday, the day after the Fed’s rate decision, the US Bureau of Economic Analysis will publish its first official estimate of Q1 GDP. Consensus forecasts suggest it will come in marginally positive. But the Atlanta Fed’s GDPNow model puts it negative at -1.8% annualised (approximately -0.45% q/q). If it does come in negative that would make two consecutive negative quarters, the rule-of-thumb definition of recession.
So would that really be a recession? The National Bureau of Economic Research (NBER) is the semi-official arbiter of recessions and they will probably say no. It’s Business Cycle Dating Committee defines a recession as ‘a significant decline in economic activity that is spread across the economy and that lasts for more than a few months’. The committee looks at a variety of measures focussing particularly on jobs, consumer spending and industrial production. In 2001 it reported a recession based on these indicators even though GDP declined for only one quarter.
Today those indicators are all very strong, at least at first sight. Non-farm payrolls (reported by firms) are up 1.8% (2.7 million jobs) in the last 6 months, retail sales are up 6.8% and industrial production has risen 2.6%. However, it is not quite so straightforward. The household survey of employment has flatlined since March and real personal spending in May was the same level as last October.
What seems to be happening is this. Incomes are rising because there are more jobs and rising wages, but higher prices for everything means people are not spending more in real terms. Hence many firms are facing flat or even declining demand for their goods or services – which explains why some are warning about more difficult trading conditions.
Flat spending does not add up to a recession of course and the NBER is unlikely to conclude that one has already started. We don’t know that for sure because data is often revised, especially at turning points. Also, the NBER is flexible in how it determines recessions. For example, it does call the 2020 downturn a recession because it was so deep, even though it lasted for only two months, not ‘more than a few months’. If we happen to get a long shallow recession this time it is not impossible that we have already passed the start date.
More likely though is that the next recession is still to come. And the signs are that it could be soon. One of the best predictors of recession is the Conference Board’s Leading Indicators Index and that is close to a recession signal. When the 6-month change goes significantly negative a recession has typically followed (see chart). That said, we have seen several mild dips into negative territory in the last 30 years which were not followed by recession so the signal is not yet clear-cut. But this is one to watch.
John Calverley Chief Economist