- The US economy shrank by 0.9% in the second quarter, following a 1.6% decline in the first quarter.
- Two consecutive quarters of contraction is often used as a shorthand for a recession, but the situation is more complicated.
- We'll know we're in a recession after we've seen sustained declines in new jobs and consumer spending.
The American public is increasingly bracing for a recession to hit, and GDP numbers out this morning were expected to provide clarity.
Except they didn't. The US economy shrank by 0.9% in the second quarter, following a 1.6% decline in the first quarter. Two consecutive quarters of contraction is often used as a shorthand for a recession, but the situation is more complicated.
Some Americans believe we're in a recession when the economy feels bad due to rising prices or high unemployment. Some see a tumbling stock market as a surefire sign of a downturn. Others use the two-quarters-of-negative-growth rule, which has long been used as a yardstick for technical recessions.
None are the actual definition of a recession. A committee within the National Bureau of Economic Research serves as the semi-official arbiter of when downturns start and end, and its criteria are much more stringent. The group defines a recession as "a significant decline in economic activity that is spread across the economy and that lasts more than a few months," according to its website. It also takes the depth, diffusion, and duration of a slump into account, adding more murkiness.
In other words, we'll know we're in a recession after we've seen months of sustained declines in new jobs, consumer spending, manufacturing, and personal income.
The vague classification is a big reason why recession predictions are all over the map right now. Where some Wall Street economists say recession fears are "over-done," others have made a downturn their base case, and there are plenty in-between likening their prediction to a coin toss.
Economic data takes a while to come in, so it's hard to call a recession until we're deep in one
Experts use a variety of indicators to forecast whether a recession is on the horizon, including the unemployment rate, consumer spending, job openings, and the quits rate. One of many challenges, however, is that the aforementioned indicators all report data on a lag. On August 2, for instance, the Bureau of Labor Statistics will report the job openings data for the month of June. Three days later, the BLS will publish the monthly jobs report for the month of July, but the data is based on a survey taken during the middle of the month.
"We are relying on the information we have, from many sources and many indicators," says Kathryn Edwards, an economist at the RAND Corporation, regarding trying to forecast a recession. "They don't all have a single interpretation, they don't always point in the same direction, they vary in their timeliness, and they don't have a consistent track record of prediction."
Among the most current indicators is the Department of Labor's weekly initial jobless claims, which was most recently released on July 28th for the week ended July 23rd. The report provides the number of new applications for unemployment benefits in a given week and is intended to reflect the level of layoffs across the economy. That number has been ticking up over the last few months, and was taken as a sign the labor market could be weakening.
But when it comes to predicting a recession, jobless claims aren't as helpful as they could be.
"It's not the worst indicator that we could make from unemployment insurance, Edwards says of the weekly claims data. "But it could be much more informative."
That's because the vast majority of people that have been laid off do not file for unemployment, making the weekly claims data — which many view as a proxy for layoffs — unreliable at best.
Moving forward, Edwards believes the gaps in the unemployment system do not only reflect the challenge of forecasting a recession, but the impact a recession could have on Americans.
"We can speculate and do our economic divination of whether or not a recession is coming," she says, "but if we don't talk about whether or not we're prepared for a recession, that conversation is meaningless in a lot of ways, at least to American families."