Is the US in a Recession?

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Last week, GDP numbers came in for Q2, and they…don’t look great.

The U.S. economy unexpectedly shrank for a second quarter in a row this year, according to data released Thursday.

GDP Flashes Recession Warning Sign, Forbes.com

The US has now experienced negative GDP growth for 2 consecutive quarters, and that’s the commonly accepted definition of a recession. So…the US is now in a recession, right?

Surprisingly, the answer is not so clear cut, and there’s plenty of disagreement about whether this is a “real” recession or not, with economists, financial analysts and (of course) politicians weighing in on both side of the debate.

But first, the good news. Gas prices across the country are falling, in some cases by quite a lot.

Prices at the pump continue to sink, providing relief to inflation-weary consumers and an economy mired in a slowdown.

Here’s why gas prices are sinking, CNN.com

So we know that rising interest rates is having its desired effect. Gas prices are continuing to come down from their nosebleed levels of $5 a gallon, and in many states are now sitting below $4 a gallon. And because energy prices have a downstream effect on everything else we buy, lower gas prices will trickle down into the rest of the economy as time goes on.

But as we’ve seen, higher interest rates don’t come for free. The big question that’s going to plague 2022 (and possibly part of 2023) is whether the economic damage from cooling down inflation will be worth it. Depending on who you ask, the damage has already been done and the US is already in a technical recession, while others are saying “not so fast” because GDP numbers alone don’t tell the whole story.

Which is correct? Let’s dig into the data to find out.

It Sucks in the Tech Sector Right Now

Before we get into the question of whether the US economy as a whole is in a recession, one area that is exhibiting all the signs of a classic recession is our old stomping grounds, the tech sector.

Hearing from my old friends and colleagues, we keep getting the same message over and over again: The tech sector is in trouble.

Just months after cutting 9% of its workforce, Robinhood on Tuesday announced plans to lay off another 23%.

Robinhood to cut 23% of its workforce, revenue sinks 44%, CNN.com

Hit by subscriber losses for the first time as well as plunging stock prices, Netflix has laid off about 475 staffers in the past three months.

Netflix Layoffs Cost Streamer $70M In Severance Charges; Nearly 500 Staffers Axed Recently, Deadline.com

Amazon shrank its staff by 100,000 last quarter, joining the ranks of Netflix and Google in an industry-wide adjustment to reduced profits, heightened inflation, and unprecedented pandemic growth

Amazon’s 100,000 job cuts reflect industry-wide adjustments to economic uncertainty, InsiderIntelligence.com

The pink slips are coming fast, furious, and from all directions. Even in companies not actively laying anyone off, hiring freezes and reneged offers are rampant, and there appears to be nowhere to hide.

The culprit is, of course, the pandemic. During the worst of COVID-19 when all the shops were closed, the tech sector was the only part of the economy expanding. It was a combination of tech being naturally compatible with working from home and everyone collectively being trapped inside their homes with nothing to do but binge-watch Netflix, order crap we don’t need from Amazon, and trade meme stocks on Robinhood.

All those companies hired like crazy to keep up with surging demand, and now that we can go outside and talk to people again, we’re cancelling our Netflix subscriptions.

The pandemic, it seems, comes for everyone eventually. Tech escaped the worst of its impacts for the first two years, but now it’s their turn on the shit list, unfortunately.

To all my colleagues in the tech sector, stay strong. This isn’t the first downturn in tech, it won’t be the last, but as long as smart phones continue to play such a central role in our lives, the sector will always bounce back.

Digging into the Numbers

Tech notwithstanding, the question of whether the broader US economy is in a recession basically boils down to three economic indicators.

The first is, of course, those two consecutive quarters of GDP contraction. A straightforward interpretation of the reports suggest that this is pretty obvious. There are two negative numbers over the past two quarters, so we’re therefore in a recession.

But remember the very real concerns we had about the Q1 GDP number. As I talked about in a previous article, the Q1 GDP number was obscured by the fact that the US imported a lot of stuff that quarter. The US typically operates on a trade surplus, meaning that they sell more stuff than they buy. This got flipped upside down in Q1 2022, with the US importing more than they exported, caused by US consumer demand rebounding but before the domestic manufacturing sector had caught up yet.

As a result, the US bought a ton of stuff from other countries to make up for the lack of domestic supply, and because of how GDP numbers are calculated, this created a one-off negative drop in the GDP. In fact, if that burst of importing hadn’t happened, the economy would have grown by 1.8%! So do we really have two consecutive quarters of negative GDP growth, or was that first one a fake-out?

The second factor that everyone’s scratching their head over is corporate profitability. Normally in a recession, companies make less money, but in this case the opposite is happening. Companies are making more money than ever!

More than halfway into the second-quarter reporting period, S&P 500 company earnings are estimated to have increased 8.1% over the year-ago.

U.S. corporate profits, economic outlooks, surprisingly upbeat, Reuters.com

Not only that, the Wall Street beat rate, which measures how many companies beat their earnings expectations, was a stunning 78%! That’s not normal for a recession at all. Those are the kinds of numbers you would expect to find in a red-hot economic expansion.

FIRECracker and I have noticed this in our own personal finances. Because dividends are such an important part of our retirement income, we track payments as they come in over the year very closely. And this year, we’ve been noticing something very odd: our payments keep consistently coming in higher than what we expected. Digging into this, we realized that what’s happening is that companies have been increasing their dividends, sometimes in quite a dramatic fashion. Our international index that tracks the MSCI EAFE’s current dividend yield is 3.7%. A year ago it was 2.3%. That’s a 60% increase in dividends! Again, not normal for a recession at all.

And finally, the big one. Unemployment.

Recessions usually cause a spike in unemployment, but we’re not seeing that in the broader economy. Unemployment in the US is currently sitting below 4%, which for all intents and purposes is considered “full employment” by the Bureau of Labour Statistics.

And not only that, just last week the July jobs report announced a massive 528,000 jobs were created.

The US economy has now regained all jobs lost during the pandemic, after a blowout July jobs report that showed a gain of 528,000 jobs, according to data released Friday by the Bureau of Labor Statistics.

Massive jobs surprise: US economy added 528,000 jobs in July, CNN.com

This caused unemployment to tick down even further to 3.5%, and represents a return to pre-pandemic levels of employment. So what the tech sector lost, it seems, has been made up by other parts of the economy that were shut down, who are now ramping back hiring as their customers come roaring back.

Technical Recession Vs. A “Real” Recession

So with some signs pointing to a recession, and other signs pointing the other way, what’s the right answer here?

I think that we have to make a distinction between a “technical” recession and a “real” one.

A technical recession is defined based on two quarters of negative GDP growth. A “real” recession, on the other hand, is somewhat subjective.

My favourite definition of a recession comes from President Harry Truman who said “It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.”

Because the most feared impact of a recession is not negative GDP growth in and of itself, but job losses.

Typically, a recession occurs in 3 phases: First, the stock market collapses. Then, job losses occur while unemployment spikes. Finally, months later, negative GDP growth gets reported confirming what everyone already knows: the country is in a recession.

In other words, the stock market normally acts as a leading indicator (a recession is coming), mass unemployment is a present indicator (a recession is here), and GDP acts as a lagging indicator (we were in a recession).

The fact that the first and last part happened without the middle bit is bizarre, and the blame for that lies squarely on one thing: the pandemic.

The world had never experienced a situation where entire economies were forcibly shut down. People were locked in their homes, businesses were shuttered, and money couldn’t be spent.

So of course unwinding all that was going to be messy and unpredictable. I don’t think that anyone foresaw just how messy and unpredictable it turned out to be, but if the result is a technical recession that exists only on paper and without the harmful effects on the job market that happens during every other recession, then maybe that’s not such a bad thing.

Conclusion

Is the US in a recession? If you’re in tech, yes.

But for everyone else, the answer is, so far, also yes but only technically. The rest of the US economy is in a technical recession, and has sidestepped the hit to the jobs market. This is what’s keeping Jerome Powell, the US Fed chairman, hopeful that he can continue to hike interest rates until inflation comes back down without triggering widespread job losses.

Here’s hoping that he’s right and that this technical recession doesn’t become a real one any time soon.

What do you think? Is the US in a recession? Has your job been impacted? Let’s hear it in the comments below!


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38 thoughts on “Is the US in a Recession?”

  1. It’s been said that a more realistic indicator of a recession is the “yield curve” or spread in yield between the 3-month U.S.Treasury note and the 10-year note. If you can make more money on a 3-month, that’s a sign that either we are in a recession, or we’re anywhere from 6 months to 2 years away from the next recession. Last inversion occured in May of 2019.

    1. I dunno, I don’t really buy that the yield curve inversion stuff as a reliable indicator of a recession. Yield curve inversions happen all the time without a recession happening, so you can’t tell which inversion is the “real” one and which is a fake one.

  2. I don’t necessarily agree that unemployment is a present indicator, but can also be a lagging indicator.

    Example: If corporate profitability starts to soften due to the interest rate increases, companies may begin to layoff employees to maintain margins, leading to an increase in unemployment.

    However, in this case, I think you are correct. It appears that many companies were conservative with hiring (outside of tech) during a time of increasing demand, leading to very strong financials. Even if demand softens, I don’t believe many businesses will reduce headcount, it will likely just result in closer to expecations earnings, rather than these astronomical beats.

    Anyway, none of this matters that much! Just thought i’d add my 2 cents (and it’s worth what you paid for it!)

  3. ” Our international index that tracks the MSCI EAFE’s current dividend yield is 3.7%. A year ago it was 2.3%. That’s a 60% increase in dividends! ”

    You’re cherry picking data here. The current dividend yield increased because MSCI EAFE is down over 18% from a year ago. No?

    You should also look at VTI dividends instead, which is still hoovering at an anemic 1.2%.

    Yes. 1.2%. That’s 1 point 2 percent !

    1. > The current dividend yield increased because MSCI EAFE is down over 18% from a year ago

      1 – might be better to look at trends in things like the trailing 12 months of actual payouts, etc.

      > anemic 1.2%

      partially due to the fact that companies are preferring to buy back their own shares to return capital to investors since that strategy is more tax efficient.

    2. You’re right, part of that is because the capital values fell, but I only looked it up because we noticed the dollar amount of dividends we got from the fund was higher than I was expecting, so most of that increase was a real dividend hike.

  4. … For those of us who have FIRE’d, I would update the old anecdote about neighbor losing job being definition of a recession….
    … when your neighbor loses their job it’s a recession, but when I GET a job it’s a depression !!!

    Actually, I’m not feeling much of a recession vibe, at least where I live (Northern California). There’s tons of jobs, even in tech, housing is continuing to skyrocket, and homeboners are happily purchasing new homes at elevated prices and increasing interest rates. I think we need another quarter or so until the situation become more clear.

  5. I think you are right. The post-pandemic resurgence in employment for the non-tech work force is what is making this a technical recession. But, tech Companies performed well during the pandemic because their employees could work remotely ensuring the same or higher productivity, and these companies could invest into innovation and growth projects. Rise in interest rates however tend to hurt tech stocks due to their high price to earnings ratios and low dividend payments. Higher rates can slow down businesses’ cash flows and stunt their reinvestment into innovation and growth projects. So, shedding employees was inevitable to reduce costs. The fed also saw an opportunity to slow down the red hot economy by raising the interest rates. If the gas prices continue to decline, the economy will do well..and inflation will reduce. But, Russia’s appetite to extend the war beyond Ukraine will keep up the pressure on gas prices.

  6. Very interesting take on technical vs real recession. This is the big takeaway from me from your article. Love reading your content!!!

    We tend to be disconnected from the day to day news in the USA (except when come visit since 99% of the news is really negative) that it is hard to measure the impact of inflation on our end. We closely track our yearly spending that seems to be between 30-40K USD (since we started to travel back in 2018) and I doesn’t seems that we are going to spend more this year again while we get to travel to places like Spain/France/Italy/Fiji and Australia

    What about you guys? While we might not be in recession, do you feel that the inflation has affected your nomadic lifestyle?

  7. I left my job last may just as the market was heading downward. Some things really bother me and are worth watching. One of them is that our leader has dementia and has a doubled the cost of gasoline because of his policies. In turn this cost deliveries from places like Amazon and every other business in our country to have to hike it’s prices up to cover those costs. So eventually you have to start laying people off because that trickles down to the consumer who stops buying things pretty simple. I’m Not hopeful that we are going to get out of this with a soft landing. The FED keeps jacking rates up and will do it again in September and also december. Causing the housing to slow down even more. Usually you jack rates up when we’re growing too fast. That’s not the case here. One more comment our wonderful government is hiring 80,000 that’s an eight followed by four zeros, agents for the IRS to start attacking our middle class. This remains to be seen. Thank you for the good article.

    1. Not much of an observation you make here, just yet another attack rant unsupported by evidence or facts from the princess.

      Saying it repeatedly doesn’t make it true, nor does it add much to the discussion, or, come to think of it, your understanding. By contrast there are well thought out arguments from some commenters here that provoke thought.

      As you show, anyone can spit bile all over a comments section, but leave it to you, princess, to manage a wall of text that says the same old **** with new word order every time.

      1. I believe the princess di comments are actually fairly spot on, and rooted in common sense and basic Econ principles. I find it baffling that anyone with a functioning brain could support the Democraps current madness….

        1. No, actually, Princess is wrong. You guys seem to forget that this madness (which is worldwide) started with a pandemic and two of the three stimulus packages were under the former administration (who wanted to increase the amount of the second stimulus to give out more money!) One, I don’t blame either administration as they were trying to keep things afloat. Two, gas prices are up because, like other products during the pandemic, there was less demand and so they shut down refineries. As people get out, the demand for gas is way up and the lessened supply is, therefore, expensive. Three, I see error in the Feds (who are suppose to be independent) waiting to increase the borrowing rates. They needed to be on top of this sooner. Four, one wonders if America will ever be able to be a country again or will it remain the 50 countries it seems to have become.

  8. We are inside an inflationary recession. A recession that was caused by inflation. This is different from the last recessions (1982, 2001, 2008) and this is why you feel it is not like a recession, while it really IS one. Here is why …

    In a inflationary recession, the nominal GDP is going up (and not down), while the real GDP is going down. The difference between the two is the deflator rate, which is the inflation rate used to adjust the real GDP to consider the changes in prices and illustrate the real products and services that were exchanged in the economy.

    The discrepancy between “real” and “nominal” GDP means the following :

    – People who have a salary increase of “only” 5% compared to an inflation rate of 8%, for example, can buy less stuff than previous years because some stuff are costing more and they have to cut back on spending somewhere else.

    – Companies have higher revenues and earnings (on average) since prices are generally going up when there are shortages. But some companies will also sell less products even if their sales are up. That is because their prices are rising faster than the decline in sales. Home Depot was a good example of this situation : sales were up 3.8% in the last quarter, but that was due to a 11.2% increase in prices offset by a 8.4% decrease in volume.

    https://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/documents/The%20Home%20Depot%201Q22%20Transcript_v2.pdf

    – In an inflationary recession, people are normaly not “laid off”, but instead they “abandon work” since it is so expensive and not worth to go to work. That’s the reason why there is so much worker shortages. You will notice those shortages are mainly in lower paying jobs (retail, food & restaurants, hospitality) and less in higher earning jobs. Companies that are unable to charge more to their customers have to close their businesses since they can’t afford more expensive workers anymore, which will then add to the unemployment …

    I think this current recession is only beginnning. Contrary to what you said, unemployment is a lagging indicator. It will probably turn negative in the coming months. But politicians certainly hope it will not show in the data in the next two months, so they can avoid the calamity of having to run for an election during an “official” recession.

    What will be more interesting to me, as an investor, is to see what the Fed will do in this situation.

    Usually, central banks lower interest rates during a recession to help the economy. But since this recession is caused by inflation, the only way to end inflation would be to continue to raise interest rates, which would be fair to potential lenders to the government, like me, to have higher compensation on bonds and treasuries.

    But now, what will happen if the recession is already started and central banks continue to raise rates ? That would mean an even deeper recession ? Some companies won’t be able to borrow anymore, forcing them to close and adding even more to unemployment ? And we’re not even talking about a housing crash, particularly in Canada. But that’s a subject for another post …

    I wonder if central banks will have the “guts” to do that. That will be very painful to everyone, except for bondholders, which are very few in proportion of the population and therefore have very little voice in elections. Higher rates would be the only way to stop the inflation, but most people prefer to spend all they have and receive free money from governments.

    My guess is that the central banks (including the Fed) will eventually back off and stop raising rates, which will allow inflation to remain elevated in the coming years (2-5% per year) …

    But this is just my guess. We will see what will happen in reality in the future !

  9. 1. You mentioned the US normally runs a trade surplus and that Q1 we ran a high deficit, and this caused the Q1 numbers to be negative. While Q1 was a high quarter, the status quo for the US is to run a current account deficit. We normally import more than we export.

    2. Layoffs normally occur at the tail end of a recession as companies work to control their costs to be in line with the market realities. It appears right now in the US companies are trying to control their labor costs by not raising wages or raising them less than the inflation rate. Raising prices but not wages could have a similar effect on overall company balance sheets as layoffs and could be why we see low unemployment numbers but also negative GDP. This is part of the confusion on if we are or if we are not in recession.

    The 2nd point has hit a majority of people. For example, I received a 5% pay raise based upon high performance, yet with inflation costs above 9% I have less purchasing power than a year ago and essentially received a real pay cut. At every corporation I have worked throughout my career, the minimum annual raise for all employees has always matched inflation. I work for a large global corporation and they have put in 6 general price increases YTD.

    I also spend about double on food than pre-pandemic, and I primarily cook from home. I live in a major US metro city.

    I will say the current “feeling” is similar to recessions I have lived thru, as we are having to tighten the belt quite a bit.

    1. 1) Oops, you’re right. Huh, I learned something new today. Thank you kind sir!
      2) Yes, totally. People’s real earning power is shrinking because wages aren’t growing as fast, and hopefully inflation comes down quickly so this doesn’t become entrenched. But I still argue that’s still better than layoffs.

  10. Bryce * Kristy, what do you think about the points that Cathie Wood is raising in our of her latest update about the market? (If you don’t know Cathie she is investor and the founder, CEO and CIO of Ark Invest, an investment firm that like to take a rather agressive approach when it come to picking assets).

    Point aside, I feel that she has some valid points, especially about the unemployment numbers (she might think some of these jobs my be from the same person, like people have to take two jobs). If you have a time to watch, I would love to get your input on it. She definitely think we are still in recession.

    Link to video: https://www.youtube.com/watch?v=Dr_QkSacr-U
    Warning: it is loaded with numbers, but I think you guys are nerds like us, so you might really enjoy it and even dissect it for your readers 😀

  11. For years we have used 2 quarters of reduced GDP as the definition of recession, why all of a sudden it’s like “maybe” a recession. Folks, this site is just trying to play word games and convince us all its not so bad. I’m hurting

    1. What is killing us, and most probably you, is inflation itself, brought on by the pandemic stimulus, supply chain issues and gas. And yes, it is still a recession by definition and Bryce says so. Unfortunately, we need to go through a recession to reset (a loaded word these days) the economy so that it can continue to grow. But “folks” won’t stop spending long enough for prices to decrease and so soon we will truly feel the recession once free flowing credit disappears. I don’t see a soft landing coming.

  12. Ha unemployment data does not count those who opt to stop looking for jobs. Right now many are happily spending their government hand out and wait for next quarter when money runs out there should a spike in number. But the mid term is coming so good numbers will be plenty and truth will be revealed after November. It is good to keep your powder dry to pick up good bargains after November

    1. Well this is confusing…..there are no stimulus checks in 2022 and the federal unemployment stimulus ended in September 2021. Do you really think that those funds could pay for living expenses for three quarters, especially with historic inflation? And what accounts for the unusual number of jobs created?

  13. Key word there, technically. Yes the lagging indicators make it hard to claim we are in a recession when you look around and people are still over-paying for cars, houses, and consuming like there is no tomorrow. Plus the jobs report. Recessions are healthy and a necessary reality check IMO. This is why you don’t carry CC debt and have an emergency fund.

  14. Why does it fucking matter? Ignore all these crap and keep adding to your portfolio.
    Find another subject to talk about because these short terms are sucking grandly

  15. Thanks for sharing your thoughts. I think in a high inflationary environment firms’ revenue and profitability may increase initially if wages follow the inflation with a significant lag. However, if high inflation -say double-digit- is persistent over time, then it might be better to compare numbers after adjusting for inflation, that is in constant prices. Besides, persistently high inflation will distort bookkeeping eventually and the application of inflation adjustment accounting might be necessary. By the way, I like your posts. Regards.

  16. As HW mentioned, the unemployment rate isn’t what counts, it’s the labor participation rate, which is still not good.

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