Recession Is Coming. No, It’s Not. Who Do You Believe? Why Should You Care?

NEW YORK (September 5) Hard landing, soft landing, no landing – forecasts for a possible recession have swung wildly this year. Lately, most bets are on no recession, but why should the average U.S. consumer even care about the R-word since it’s been so frequently bandied about in the nation’s constant economics chatter?

“Whether we are heading into a recession or not, growth is not feeling spectacularly strong right now,” said Columbia University Economics Professor Brett House, who served as an economist at the International Monetary Fund for nearly a decade. “It’s unlikely to feel entirely satisfying this year or next year.”

Despite recession warnings from top economists, including staff at the Federal Reserve and the chief economists of Wall Street’s biggest banks, the economy has grown at about a 2% pace since last year. Nevertheless this rate feels sluggish compared with the blockbuster growth rate of 5.9% coming out of the pandemic in 2021.

“The difference between being mildly in a recession or mildly in positive growth isn’t terribly meaningful,” House said.

A Squishy Definition

A recession, most students learn in Economics 101, is two consecutive quarters of negative economic growth. But that definition doesn’t cut it any more.

Last year the nation’s gross domestic product shrank in the first and second quarters, meeting this traditional definition of a recession, but the Boston-based National Bureau of Economic Research (NBER), the official arbiter of recessions, did not declare one.

“A recession has three essential ingredients: depth, diffusion and duration,” said Jeffrey Roach, chief economist for LPL Financial in Charlotte, N.C.  “The first half of 2022 did not have all of those necessary ingredients because consumer spending was too strong to get a recession.”

The NBER, however, did declare a recession in 2020, and if you blinked, you may have missed it.  “The recession lasted two months, which makes it the shortest US recession on record,” the think tank reported more than a year after the fact.

The duration of this sharp, pandemic-driven downturn didn’t quite meet the NBER’s definition of a recession, which is  “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” And the NBER is often late to a downturn, declaring a recession when there’s already red ink spilling in the streets. The group didn’t declare the painful recession that began in 2007 until December 2008.  

“In 2008 most people knew we were in a recession well before it was declared a recession,” recalls Chris Fasciano, a portfolio manager with Commonwealth Financial Network in Waltham, Mass.

The stock market crashed, home values plummeted, banks failed many of America’s biggest companies and financial institutions received government bailouts. Americans lost homes, jobs and retirement funds en masse. It came to be known as the “Great Recession,” but the NBER didn’t declare it until most of the damage was done.

“Whether some organization in Boston after the fact calls a period a recession or not, the important thing to focus on is what are the actual lived experiences of businesses and households on the ground,” said House.

And in the world’s largest economy,  those experiences can vary widely with some industries doing well while others are facing tribulations.

Low Marks for Bidenomics

Polls have consistently shown that a large swath of Americans aren’t happy with the direction of the economy. In an August Gallup poll, 42% rated current economic conditions as “poor,” and 32% rated them “only fair.” And throughout his presidency, Joe Biden has had a tough time convincing Americans that his administration can make a difference.

A recent poll from The Associated Press-NORC Center for Public Affairs Research shows only 36% of U.S. adults approve of Biden's handling of the economy, despite a raft of economic improvements since he took office.

These sentiments come even in the face of vibrant consumer spending, a labor market that is still pushing wages higher and housing prices that are still holding strong. 

Inflation is stubbornly high and interest rates have been rising, but by many other measures, the economy is still chugging along just fine. If it were to slide into an NBER-defined recession, economic reality could be far darker.

“The average American should care about a recession because it could have an impact on their quality of life,” said Yelena Maleyev, senior economist at KPMG. “Whether this means less pay, a loss of a job, the inability to afford necessities or worsening future prospects, these impacts are important to households.”

The current consensus is that the economy will avoid a recession, but that’s a more recent assessment based on a slew of economic data that has come in better than expected. 

Inflation topped 9% in June 2022 as the nation emerged from the pandemic. To fight it, the Federal Reserve has raised interest rates 11 times since March 2022 to a 22-year high of 5.25% to 5%. Most economists expected this jarring increase to tip the economy into at least a mild recession and cause a sharp increase in unemployment – but so far it hasn’t.

Inflation has come down to 3.2%, and the unemployment rate, though up slightly, is still at a healthy 3.8%.

What's at Stake

“We’re looking at an 85% chance or better or a soft landing,” said Jennifer Harris, who recently served as a special assistant to Biden as well as a senior director on the National Economic Council and the National Security Council.  “But as with everything, there are risks, like the lagging effects from the Fed’s recent hikes – the full shape of which we do not yet know.”

Those hikes are still wending their way through the economy. And what’s at risk are the many Americans who’ve entered the labor market for the first time – minorities, as well as younger and older workers.  Harris worries about a “last in-first out” dynamic, putting these employees out of work first if unemployment rises and a recession takes hold.. 

“The stakes are high around getting a soft landing right,” she told The Messenger.

So far, so good. And in the end, it may be that there will be no recession and no soft landing, but something the economy is already suffering. 

“The alternative could be that the U.S. economy is going through a series of rolling recessions across industries that started last year,” Fasciano said. “ It might not result in an official recession, but it certainly feels like one for people who own and work in those businesses.”

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