Is Recession Nearing?

~Hazel Mathew.

The term Recession is discussed several times in current news. Is the US economy heading towards Recession? Or is the US economy already in Recession? But to answer these questions one must know what Recession is and what are the major indicators.

According to the National Bureau of Economic Research (NBER) a recession is “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

During recession it is difficult to witness any sort of economical growth. Inflation keeps rising (not always), consumers are unable to spend due to constant rising prices. Producers therefore hesitate to produce goods. Rise in housing prices. Consistent increase in Interest rate to control inflation. Unemployment in the country. People lose faith in the economic system of the country. These are just some of the factors that get affected greatly during a recession.

What are the economic indicators?

GDP – GDP numbers are considered to be extremely important economic indicator of recession. For some economists two negative GDP quarters will be a sign for recession.

The American economy shrank for 2 quarter. The recent data, GDP was -0.9 percent in the second quarter. (Source: trading economics, U.S. Bureau of Economic Analysis)

Rising Unemployment- If people are losing their jobs or unable to get any jobs despite being perfectly qualified for the job, then it is a very obvious sign that the economy is in the path of downfall.

The U.S. employment rate has been stable since past four months at 3.6 percent. (Source: trading economics, U.S. Bureau of Economic Analysis)

Retail Sales- It is sale of goods and services by the retailers to the consumers. A drop in these numbers shows that retailers are unable to make sales in the economy. Consumers are not able to spend more than at average rate of previous months / quarters.

The U.S. Retail sales jumped to 1 percent in June 2022, recovering from the drop of the past four months. (Source: trading economics, U.S. Census Bureau)

Manufacturing PMI- It is an economic condition derived from monthly survey to understand the market condition. It studies the business activity in manufacturing and service sector.

The U.S. manufacturing PMI was 52.3 in July 2022 which is slightly lower from June 52.7. (Source: trading economics, Markit economics)

One cannot say whether the economy is a recession by only studying any one indicator. For e.g. If we look at the U.S. GDP numbers then there has been negative for 2 quarters which is a sign of recession, but if we look at other indicators like unemployment or retails then there’s been stable or little growth. Which is why it is difficult to know for sure whether the economy is in recession.

Just by looking at the numbers is not enough. If we observe, even with the current rising prices consumers still buy the products they want, they may cut back a little or reduced their quantity but there is still consumption happening. Food stalls are crowded and shops are busy. We can say we are in recession when consumers no longer buy products due to the price and manufacturers are unable to produce anymore because of manufacturing costs. But that is not the case yet, industries are still producing and consumers are still consuming even when its expensive. So, in a way, the basic economic activity of manufacturing and consuming is still running enough. But if inflation rates and the interest rates keeps rising at the same pace they are now then it seems like recession is sure to come soon.

There is fear of recession among people because of continuous rise in the interest rates since past few months. The Federal Reserve raised the interest rates by 75bps to 2.25% this is to tackle the price rise (inflation) which is at 9.1% in June 2022, the highest since November 1981. Both the interest and the inflation rates are expected to rise in the coming months. Which will make the economic situation even more dire. (Source: trading economics, U.S. Bureau of Economic Analysis)

National Bureau of Economic Research (NBER) is the official agency to determine whether the economy is in recession or not. White House Press Secretary Karine Jean-Pierre, in her recent interview stated “two consecutive quarters of negative GDP growth" is "not the definition of a recession."

In the next several months many of the economic data released will give a much clearer image as to how far recession is or we are in recession already. Whatever it may be, investors, businessmen and also the common people must be prepared considering the current economy around the world.