A common definition is that a recession occurs when there are two consecutive quarters of declining in gross domestic product (GDP). The GDP is the total of all the goods and services produced in a country. The National Bureau of Economic Research (NBER) determines when the United States (U.S.) is in a recession. It is a private nonpartisan organization that began dating business cycles in 1929. The committee, which was formed in 1978, includes eight economists who specialize in macroeconomic and business cycle research.1 The NBER 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 looks at the big picture and makes exceptions as appropriate. For example, the economic decline of March and April 2020 was so extreme that it was declared a recession even though it lasted only two months.2

The committee studies a range  of monthly economic data, with special emphasis on six indicators: personal income, consumer spending, wholesale-retail sales, industrial production, and two measures of employment. Because official data is typically reported with a delay of a month or two — and patterns may be clear only in hindsight — it generally takes some time before the committee can identify a peak or trough. Some short recessions (including the 2020 downturn) were over by the time they were officially announced.3

Public Opinion
Consumer sentiment is a significant factor. It is a powerful factor in consumer spending. Consumer spending is a substantial part of GDP. An early July poll, 58% of Americans said they thought the U.S. economy was in a recession, up from 53% in June and 48% in May.4 Yet many economic indicators, notably employment,  remain strong. The current situation is unusual, and there is little consensus among economists as to whether a recession has begun or may be coming soon.5

GDP
Real (inflation-adjusted) GDP dropped at an annual rate of 1.6% in the first quarter of 2022 and by 0.9% in the second quarter.6

Since 1948, the U.S. economy has never experienced two consecutive quarters of negative GDP growth without a recession being declared. However, the current situation could be an exception, due to  the strong employment market and some anomalies in the GDP data.7

Negative first-quarter GDP was largely due to a record U.S. trade deficit, as businesses and consumers bought more imported goods to satisfy demand. This was a sign of economic strength rather than weakness. Consumer spending and business investment — the  two most important components of GDP — both increased for the quarter.8

Initial second-quarter GDP data showed a strong positive trade balance but slower growth in consumer spending, with an increase in spending on services and a decrease in spending on goods. The biggest negative factors were  a slowdown in residential construction  and a substantial cutback in growth of business inventories.9 Although inventory reductions can precede a recession, it’s too early to tell whether they signal trouble or are simply a return to more appropriate levels.10 Economists may not know whether the economy is contracting until there is additional monthly data.7

Employment

Economic data has been mixed recently. Consumer spending declined in May when adjusted for inflation, but bounced back in June.11 Retail sales were strong in June, but manufacturing output dropped for a second month.12 The strongest and most consistent data has been employment. The economy added 372,000 jobs in June, the third consecutive month of gains in that range. Total nonfarm employment is now just 0.3% below the pre-pandemic level, and private-sector employment is actually higher (offset by losses in government employment).13

The unemployment rate has been 3.6%  for four straight months, essentially the same as before the pandemic (3.5%),  which was the lowest rate since 1969.9 Initial unemployment claims ticked up slightly in mid-July but remained near historic lows.14  In the 12 recessions since World War II, the unemployment rate has always risen, with a median increase of 3.5 percentage points.16

With employment at such high levels, it may be questionable to characterize the current economic situation as a recession. However, the employment market could change, and recessions can be driven by fear as well as by fundamental economic weakness.

Inflation
The fear factor is inflation which ran at an annual rate of 9.1% in June, the highest since 1981.17 Wages have increased, but not enough to make up for the erosion of spending power, making many consumers more cautious despite the strong job market.18 If consumer spending slows significantly, a recession is certainly possible, even if it is not already under way.  Inflation has forced the Federal Reserve to raise interest rates aggressively, with a 0.50% increase in the benchmark federal funds rate in May, followed by 0.75% increases in June and July.18 It takes time for the effect of higher rates to filter through the economy, and it remains to be seen whether there will be a  “soft landing” or a  more jarring stop that throws the economy into a recession.

Among the factors driving inflation are: Covid-19, Russian Invasion of Ukraine, supply chain disruptions, CARES ACTs 1, 2 and 3, fewer homes for sale than buyers, limited supply of semiconductors .

Unfortunately, no one knows the future, and economic forecasts vary significantly. Forecast range from remote chance of a recession to an imminent downturn with a moderate recession in 2023.19 If that turns out to be the case, or if a recession arrives sooner, it’s important to remember that recessions are generally short-lived, lasting an average of just 10 months since World War II. By contrast, economic expansions have lasted 64 months.20 To put it simply: The good times typically last longer than the bad.

Projections are based on current conditions, are subject to change, and may not happen.

1-3) National Bureau of Economic Research, 2021

4)  Investor’s Business Daily, July 12, 2022

5) The Wall Street Journal, July 17, 2022

6) U.S. Bureau of Labor Statistics, 2022

7-8) MarketWatch, July 5, 2022

6,9,11,21) U.S. Bureau of Economic Analysis, 2022

10) The Wall Street Journal, July 28, 2022

12) Reuters, July 15, 2022

13–14, 17–18) U.S. Bureau of Labor Statistics, 2022

15) The Wall Street Journal, July 14, 2022

16) The Wall Street Journal, July 4, 2022

19)  Federal Reserve, 2022

20) The New York Times, July 1, 2022