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Are we in a Recession?

July 27, 2022
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The U.S. Bureau of Economic Analysis will release the second quarter Gross Domestic Product (GDP) on Thursday, July 28th.  The Atlanta Fed GDPNow is estimating year over year GDP growth for the second quarter to be -1.6% (As of July 19, 2022).  If the quarterly GDP figure is negative, it will mark two consecutive quarters of negative GDP growth and intensify the recession debate.  Some may point to two consecutive quarters of negative GDP growth as evidence we’re in a recession but it’s not the official definition.      

The “official” arbiter of determining if the economy is in a recession is the National Bureau of Economic Research (NBER).  The bureau maintains a cycle dating committee that identifies the dates of peaks and troughs in economic activity.  According to NBER’s website, a recession is defined as a significant slow down in economic activity that spreads across the broad economy for more than a few months[1].  Interestingly, the committee doesn’t maintain a fixed formula for weighting economic data to confirm a recession.  Instead, the committee looks at three criteria (depth, duration, diffusion) related to numerous economic reports from federal statistical agencies.  Types of data that is evaluated includes real personal income, nonfarm payroll employment, real person consumption expenditures, wholesale-retail sales, and industrial production.

The economy has decelerated over the past year due to high inflation, continued supply chain issues, Ukraine-Russia conflict, and high interest rates.  Record lows in consumer sentiment are reflective of these issues and if they continue to persist, a recession could be on the horizon.  However, federal statistical data such as unemployment, industrial production, corporate profits and Gross Domestic Income show an economy that is still growing.

  • The economy managed to generate 372,000 jobs in June and has averaged 450,000 new jobs so far in 2022. This has helped the unemployment rate decline from 4.0% to 3.6%[2].
  • Industrial production was up at an annual rate of 6.1% for the second quarter of 2022[3].
  • First quarter corporate profits with inventory valuation and capital consumption adjustments were up 12.5% year over year[4].
  • Gross Domestic Income (GDI) was up 1.8% in the first quarter of 2022[5]. GDI, an alternative to GDP for assessing the health of the economy, measures the income earned and costs incurred in the production of gross domestic product.

 Although some metrics are flashing a recession, other parts of the economy are still showing a healthy market environment which makes determining a recession much more difficult.

 On a recent market outlook call, a portfolio manager discussed analyzing market signals and stated, “You have to respect the market and what it’s telling you.”  A highly watched recession indicator is yield curve spreads.  If a short duration bond yields more than a longer duration bond with similar credit quality, it means the yield curve has inverted.  Over the past few months, the popular 2-year/10-year treasury yield curve has inverted three times.  The inversion has gained attention since most recessions have been preceded by a yield curve inversion.  However, a 2-year/10-year treasury yield curve inversion doesn’t mean a recession is imminent.  Over the past six recessions, a recession occurred on average 18.7 months after the yield curve inverted[6].  Additionally, it is still up for debate as to which yield curve is a better predictor of a recession.  This is something we are monitoring and could be foreshadowing potential problems for the economy ahead.


[1] Business Cycle Dating, National Bureau of Economic Research,; www.nber.org/research/business-cycle-dating

[2] Total Nonfarm All Employees, U.S. Bureau of Labor Statistics; www.bls.gov/ces/

[3] “Industrial Production and Capacity Utilization.” Board of Governors of the Federal Reserve System; Release date July 15, 2022.

[4] Corporate Profits, Bureau of Economic Analysis, U.S. Department of Commerce; www.bea.gov

[5] Gross Domestic Income, Bureau of Economic Analysis, U.S. Department of Commerce; www.bea.gov

[6] Detrick, Ryan. “10 Things to Know About Inverted Yield Curves.” April 6, 2022. https://lplresearch.com/2022/04/06/10-things-to-know-about-inverted-yield-curves/