when will I switch from "recession watch" to "recession warning"?
The best predictor of an upcoming recession is an inverted yield curve, when short-term interest rates are higher than long-term interest rates for a period of several months. But when will we know that we're actually in a recession?
A traditional measure of recession has been --> two successive quarters of declining GDP. But that takes over six months to measure, and the NBER hasn't always recognized two negative quarters as an official recession. Sometimes GDP numbers fluctuate due to seasonal factors and blink red even though unemployment and retail sales remain stable. This can happen when a winter is unusually cold, or supply chains get temporarily backed up, or a change in the law causes people to temporarily speed up or slow down their purchases of something (you might remember Y2K and the weird effects that had on people). The official definition of a recession, according to the NBER, is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
The best two contemporaneous indicators that we're already in a recession are --> (1) when the unemployment rate has increased by more than half a point compared to a year ago, or (2) monthly payroll numbers have decreased for three months in a row.
Right now neither of these indicators point to a recession already underway. History suggests it is too early for the recession to have begun, because the inverted yield curve is only three months old. It should take at least another five months before things head south in a big and measurable way. But, something could spook businesses and consumers earlier than the historical range suggests, like the pandemic shutdown did in March 2020.
A big bank failure, like what happened yesterday, can spook people and create a "contagion" effect in which customers of other banks worry about their own deposits and search for safer alternatives. People can talk themselves into worrying about a recession and thereby cause one with their herdlike retreat from economic activity. Bubbles can pop quickly as people rush for the exits in an attempt to preserve their gains.
But the US economy is huge and has a sort of forward momentum. Not everybody pays attention to the news or freaks out when a symbolic shot is fired at the economy. We're inside a probability function now, it is difficult to predict exactly when the recession will start or how deep it will be. Theoretically the Federal Reserve could still retreat by cutting interest rates before the recession begins. Or bank regulators could announce they're lifting the FDIC's limits on bank account insurance. Or Congress could get its act together and raise the federal debt ceiling LOL.
I'll be watching the monthly unemployment and payroll statistics but so far we're not there yet.
A traditional measure of recession has been --> two successive quarters of declining GDP. But that takes over six months to measure, and the NBER hasn't always recognized two negative quarters as an official recession. Sometimes GDP numbers fluctuate due to seasonal factors and blink red even though unemployment and retail sales remain stable. This can happen when a winter is unusually cold, or supply chains get temporarily backed up, or a change in the law causes people to temporarily speed up or slow down their purchases of something (you might remember Y2K and the weird effects that had on people). The official definition of a recession, according to the NBER, is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
The best two contemporaneous indicators that we're already in a recession are --> (1) when the unemployment rate has increased by more than half a point compared to a year ago, or (2) monthly payroll numbers have decreased for three months in a row.
Right now neither of these indicators point to a recession already underway. History suggests it is too early for the recession to have begun, because the inverted yield curve is only three months old. It should take at least another five months before things head south in a big and measurable way. But, something could spook businesses and consumers earlier than the historical range suggests, like the pandemic shutdown did in March 2020.
A big bank failure, like what happened yesterday, can spook people and create a "contagion" effect in which customers of other banks worry about their own deposits and search for safer alternatives. People can talk themselves into worrying about a recession and thereby cause one with their herdlike retreat from economic activity. Bubbles can pop quickly as people rush for the exits in an attempt to preserve their gains.
But the US economy is huge and has a sort of forward momentum. Not everybody pays attention to the news or freaks out when a symbolic shot is fired at the economy. We're inside a probability function now, it is difficult to predict exactly when the recession will start or how deep it will be. Theoretically the Federal Reserve could still retreat by cutting interest rates before the recession begins. Or bank regulators could announce they're lifting the FDIC's limits on bank account insurance. Or Congress could get its act together and raise the federal debt ceiling LOL.
I'll be watching the monthly unemployment and payroll statistics but so far we're not there yet.