LONDON (Reuters) – Recessions are notoriously difficult to define precisely, as U.S. Supreme Court Justice Potter Stewart is famous for his flexible definition of obscenity (“you know it when you see it”). there is
Observers often disagree at that point on whether the economy is already in recession, and then whether a recession has occurred or just a “soft patch” of an uninterrupted cyclical expansion. Opinions may differ as to whether it is too much.
In most countries, a recession is informally defined as two consecutive quarters of negative growth in real gross domestic product, but using GDP data in this way has the drawback of being subject to significant revisions. there is.
In the United States, the National Bureau of Economic Research (NBER) has a more flexible definition of a recession as “a significant decline in economic activity that spreads across the economy and lasts for more than a few months.”
This definition emphasizes three characteristics: depth, breadth, and duration, to distinguish between a recession and a gradual slowdown in the economy as a whole, or a cyclical recession confined to one or a few sectors. .
In fact, the NBER’s Business Cycle Dating Commission is a recognized recession arbiter and employs a variety of indicators to determine when a recession has occurred.
“The commission focuses on measures of economic activity across the economy because a recession should have a broader impact on the economy, rather than being confined to one sector,” the NBER said on its website. are doing.
These indicators include transfers paid after personal income deduction (PILT), non-farm employment, household employment, real personal consumption expenditure, industrial production, and others.
Even with this set of indicators, the NBER often determines that an economy has experienced a recession months after the start of the recession, and some recessions may approach recessions without being declared. I have.
on the threshold
Based on recent data, the U.S. economy is currently stalled on the line between a major mid-cycle downturn and a formal recession at the end of the cycle.
The industrial side of the economy, including the manufacturing and freight forwarding sectors, is already in a deep and prolonged slump, perhaps reaching the threshold of a recession.
Manufacturing has contracted since November 2022, according to the Monthly Business Survey, with the downturn evidenced by lower container freight, diesel consumption and industrial electricity sales.
But the same survey shows that the much larger service sector is still reporting marginal growth, keeping the economy as a whole far from recession so far.
Chartbook: US Economic Indicators
The Institute for Supply Management (ISM) service sector index was 51.9 in April (more firms reported expansion than contraction), while the manufacturing sector index was just 47.1.
The contrast between sectors is less than it appears. The services index is generally higher than the manufacturing index throughout the business cycle, but both move in roughly the same direction.
In April, the ISM Services Index remained in the 15th percentile for all months since 1997, while the Manufacturing Index remained in the 9th percentile.
If the manufacturing sector is already in recession, the services sector is just avoiding it for now.
income and employment
So far, growth in consumer spending has helped offset a sharp slowdown in business investment and efforts to reduce excess inventories by suspending or reducing new orders.
Increased employment, cost-of-living adjustments to wages and salaries, and increased income from tax cuts allowed households to continue spending.
Real personal income, net of transfer payments, increased by 1.7% year-on-year in the first three months of 2023, accelerating significantly from 0.3% in the second quarter of 2022.
Combined with spending returning from goods to services following the end of the pandemic and travel restrictions, the substantial increase in PILT gave some of the services sectors a boost despite inflation.
Although lower gasoline prices have eased some pressure on households and slowed growth, employment is still growing in both manufacturing and services, supporting incomes.
At the same time, interest rates are still rising and household and business credit conditions are tightening in the wake of the local banking crisis.
recession as a story
More informally, but fundamentally, the economist Robert Shiller compares recessions to ‘narratives’ that spread through the economy, like epidemics (The Economics of Narratives, Shiller, 2017).
“A recession means that many people cut back on spending and either don’t buy new furniture and get by with old furniture for the time being, or postpone starting new businesses or hiring new people in existing businesses. It’s time to get down.”
Some recession-related stories have become more common over the past nine months, which could portend a further slowdown in the business cycle.
Many prominent companies have come to prioritize efficiency, cost control and profit over growth. Investment has slowed and job cuts have become commonplace in at least some sectors of the economy.
The only strong sector of the economy is non-farm employment growth. But even here, growth is slowing, and there are signs that the labor market is starting to cool.
The number of people filing for unemployment benefits for the first time each week has started to creep up since the third quarter of 2022, which was the lowest in decades.
A more cautious approach to individual household and business spending makes sense, but overall it’s a recession.
In recent decades, recessions and mid-cycle weakness have typically led central banks to cut interest rates to encourage spending.
But with unemployment at a multi-decade low, rising labor costs and limited economic space, central bank policymakers may prioritize controlling inflation over supporting growth. is high.
– US Industrial Recession Cuts Diesel and Electric Use (May 4, 2023)
– A difficult landing has already arrived for US manufacturers (April 4, 2023)
– Sustained inflation exacerbates Fed’s interest rate dilemma (14 Mar 2023)
– Is the recession now or later? Unenviable Alternatives for 2023 (January 26, 2023)
John Kemp is a market analyst at Reuters.the views expressed are his own
By John Kemp.Editing: Susan Fenton
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