Are we in a recession? US economy has been remarkably resilient so far
Paul Davidson, USA TODAY
Updated 5 min read
Over the past year, economists have proclaimed that the U.S. is headed toward recession so relentlessly, you might think we’re already knee-deep in a slump.
But the economy has been remarkably resilient and, though wobbly at times, has repeatedly defied forecasts of a downturn. Economists, in turn, have continued to push out their estimates of when a recession will begin and many now believe the nation will avoid one.
Yet while the outlook has brightened recently, forecasters still say there’s a 47% chance of a mild slide in 2024, according to those surveyed by Wolters Kluwer Blue Chip Economic Indicators.
Many Americans are familiar with the informal definition of a recession: Two straight quarters of declining gross domestic product, which is the value of all goods and services produced in the U.S.
But the real litmus test is more subtle. A recession is “a significant decline in economic activity that is spread across the economy that lasts more than a few months,” according to the National Bureau of Economic Research. The bureau looks at a variety of indicators, particularly employment, consumer spending, retail sales and industrial production. The nonprofit group often announces when a recession has begun and ended months after those milestones have occurred.
GDP fell each of the first two quarters of 2022 but much of the drop was traced to changes in trade and business inventories – two categories that don’t reflect the economy’s underlying health. In 2023, GDP growth has been solid and, more recently, robust.
Why do some economists expect recession?
From March 2022 to July 2023, the Federal Reserve raised interest rates at the fastest pace in 40 years to bring down inflation. Typically, when the Fed hikes rates so aggressively, borrowing to buy a home, build a factory and make other purchases becomes much more expensive. Economic activity declines, the stock market tumbles and a recession results.
But with inflation now easing more dramatically, Fed officials recently signaled they're probably done hoisting rates and are forecasting three rate cuts in 2024. That has propelled the S&P 500 stock index near an all-time high, swelling 401(k) balances and making Americans feel wealthier. And that could lead to more spending that boosts the economy.
Was there already a recession?
No. During the pandemic, households amassed about $2.5 trillion in excess savings from hunkering down at home and trillions of dollars in federal stimulus checks aimed at keeping workers afloat through layoffs and business closures.
As a result, Americans have a big cushion of savings to help them weather high inflation and interest rates. They’ve whittled down much of those excess reserves but somewhere between a couple of hundred billion dollars and just over $1 trillion remains, depending on whose estimate is most accurate.
Consumers also still have some demand to travel, go to ballgames and dine out now that the health crisis has receded. So while consumption flagged in the second quarter, it bounced back and grew 3.1% in the July-September period.
Also, both households and businesses have historically low debt levels overall, Moody’s says, so they’re not burdened by high monthly debt service payments. Credit card debt, however, recently reached an all-time high, squeezing low- and middle-income consumers.
Almost certainly not. Housing has been in the doldrums, with home prices declining on a month-to-month basis, because of high mortgage rates. And manufacturing activity has contracted for 13 straight months, also in part because of high rates that have dampened business capital spending.
But housing may be turning corner. Existing home sales increased in November after five months of declines. And consumer spending, which makes up about 70% of GDP, has been surprisingly healthy, as noted.
As a result, the most critical economic indicator – employment – has stayed solid, with the public and private sectors adding an average of 204,000 jobs a month from September through November, though that's down from about 300,000 early in the year. Also, longstanding labor shortages have led many businesses to hold onto workers instead of laying them off despite faltering sales.
All told, the economy is losing some steam but it’s not shrinking. GDP grew at a robust 4.9% annual rate in the third quarter. And it’s projected to grow 1% in the current quarter and a bit more than that in 2024, according to the economists polled by Wolters Kluwer - a significant slowdown but not a slide.
Most economists no longer expect a downturn in 2024. They say the Fed’s high interest rates may be felt more profoundly by some consumers and businesses but as early as spring, they expect the Fed to be lowering rates, partly reversing the impact on borrowing and spending.
Perhaps the most reliable indicator of a coming recession is an inverted yield curve. Normally, interest rates are higher for longer-term bonds than shorter-term ones because investors need to be rewarded for risking their money for a longer period.
But the yield on the 2-year Treasury bond has been well above the 10-year Treasury since spring 2022. That’s been a consistent signal of recession because investors move money into safer longer-term assets – pushing their prices up and their yields down – when the economic outlook grows dimmer.
Recently, however, the gap between 2- and 10-year Treasuries has narrowed. perhaps signaling that the risk of a slump is falling.
