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Are we already in a recession?

Are we in a Recession Now or is it Only Coming or Not Coming at All?

When the recession hits economies, the lives of the common people are affected by the accompanying rise in prices of essential goods and services like food, energy, and utilities. Are we currently in such a situation? Let us examine this. Just when world economies were struggling to recover from the economic downturn inflicted by the Covid-19 pandemic, the Russia-Ukraine war arrived adding salt to the wound. 

Everyone has been waiting with crossed fingers for a prolonged economic downturn, and we are yet to see one, but governments and economists across the globe are expecting that these two events - the pandemic aftermath and the Ukraine war - combined would push the global economy into recession next year.  Any economic report or study that comes out with a negative outlook creates an apprehension of an impending recession, but the fact is that many of these indicators and signs don’t mean the exact arrival of a recession.

The National Bureau of Economic Research (NBER), an NGO organization consisting largely of economists, is looked upon as an authority to forecast and determine when recessions arrive and for how long they will prevail, in the US, which usually impacts the economies across the world. However, they don’t consider the current state of the economic situation as a recession in the US. Here is why they think so:

 

What is not considered

Many were counting the rising inflation this year and the initiatives of the Federal Reserve to fight it by raising interest rates, as the signal of the arrival of recession in the US. Inflation has remained a larger economic problem though it has been getting slowed off later. However, NBER economists do not focus on inflation as a major direct driving factor of recession, though they consider that interest rates matter in tracking other economic measurements.

The inverted yield curve is often considered by many as a recessionary warning. This is a situation where short-term interest rates become higher than long-term rates, a relationship that is the reverse of the normal. This situation prevails now in the US, but NEBR does not count this as a direct factor, even when the inverted yield curve has a history of concurring with recessions.

The weakening of the prices of assets, such as stocks, housing, and cryptocurrency is another indicator of a recession happening. But they’re not directly tracked by the NBER on its recession radar, either, because the stock market often tanks on the fear of recession, but these market downturns are not necessarily the reason or the effect of recession.

 

What is considered

The economists at NBER focus on six measures that can be put simply as follows: 

  • personal income less transfers (PILT), 
  • personal consumption/spending, 
  • retail/wholesale sales 
  • and industrial production, 
  • plus two measures of national employment/unemployment.

A significant downturn in economic activity that prevails across the economy for more than a few months is the symptom the NBER economists focus on.  According to J.P. Morgan Asset Management, that isn’t the situation we are currently in because, in the past six months ending September, all the measures except the wholesale/retail sales, have gained. 

 

Where do economies stand now?

That said, it doesn’t mean the economy is booming now. A  large number of Americans are feeling the pinch of the economic slowdown. Their income is becoming short for meeting the expenses and paying bills and many are defaulting on credit card and other debt payments coupled with Fed continuing to tighten the liquidity. Unemployment, layoffs, and recruitment freeze typically coincide with economic downturns as we saw, for example, unemployment rates peaking at 10% in 2009 or 14.7% in 2020.

We are currently watching the news about layoffs, but they are mostly in the technology sector and not widespread across industries. The U.S. unemployment rate, which stood at 3.7% in October, is actually slightly below where it started the year. Consumer spending has not slowed and the National Retail Federation forecasts an increase of 6% to 8% in spending in the holiday season during November and December compared with the same period in 2021.

 

Major setbacks forecasted for 2023

The economic slowdown across the globe will see real GDP going below the trend that existed prior to the pandemic, with the world economy expected to drop above $17 trillion, nearly 20 percent of the world's income. According to a United Nations Conference on Trade and Development (UNCTAD) report, countries that are likely to contribute to the global GDP loss include Russia, Indonesia, India, the UK, and Germany, among others. While India is expected to bear a loss of an output of 7.8 percent in 2023, the Euro area may lose 5.1 percent, with China shedding 5.7 percent, the U.K. 6.8 percent, and Russia 12.6 percent output. 

A new study by  World Bank shows that central banks across economies are hiking interest rates, but it may create various financial challenges along with recessions rather than helping countries control inflation. The International Monetary Fund (IMF) has also indicated the possibility of a recession, if we read from the IMF's MD Kristalina Georgieva’s statement earlier this week that the global economic growth might be less by $4 trillion through 2026, triggering an alarm that it might get worse before it gets better. The most affected by the recession will be the developing countries, which are spending more money to repay service their public debt and pay interest and are on the edge of debt default. 

UNCTAD estimates that the raising interest rate by developed economies is affecting developing countries the most. It says that the majority of developing countries have experienced their currencies weaken against the dollar. We are witnessing a drastic peaking of food and fuel prices in 2022 - factors that directly affect the lives of common people -, with the Indian basket of crude oil prices averaging $102.14 a barrel from April-October 2022, against $79.18 a barrel in 2021-22 and $44.82 a barrel in the previous financial year. 

 

Is it coming and going to be alarming?

NBER is not forecasting a severe recession in the US and a lot of economists and authorities across the globe believe the historical trends, and several economic factors point to a less severe recession. They point out that the housing and auto industries are strong, with housing prices remaining high and resilient. Likewise, the labor-market dynamics remain robust, with the market showing record-high ratios of new job openings to potential applicants. The corporate balance sheets are in the best shape in decades across companies, and the banking system. 

History shows that the markets forecast recession better than economists. Though markets can also send false signals, they have been more consistent in anticipating real recessions more accurately. However, when the consensus among economists is so strong, even when their recession forecasting record is so poor, the quote from Keynes becomes appropriate - “ The inevitable never happens. It is the unexpected always.”. The unexpected is a constant in markets and the economy, which suggests we should try to believe that a recession is not inevitable. It is advisable for companies to have alternative sources to manage uncertainties when a recession sets in.

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