By Paul Gomme and Peter Rupert
Recession fears have been ignited and businesses, consumers and governments have begun to put up their anti-recession shields. But what do the data say? First, due to the pandemic and mandatory shutdowns, it is very difficult to compare the changes in the data today to that of one or two years ago when trying to assess overall economic activity. Second, in many respects, a lot of the current data do not appear to be in recession territory.
So what are the data telling us about a recession? Jeremy Piger uses a dynamic-factor Markov-switching (DFMS) model, originally developed by Marcelle Chauvet, to calculate the probability that the US economy is in a “recession” using four monthly variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. For the most part, periods when the NBER has determined that the US economy is in recession coincide with periods that the model assigns a high probability to being in a recession. As of August 1, 2022, the model assigns a probability of 1.72% of being in a recession.
Several bellwether measures have been released over the past week or so. The first was real GDP, released Thursday, July 28. The report showed a second consecutive decline. While two consecutive quarters of negative GDP growth are often taken to mean that the economy is in recession, it’s the NBER’s Business Cycle Dating Committee that officially make this determination. One problem is that this committee often waits several months before making its determinations. As a result, the committee offers no help in assessing the current state of affairs.
While overall real GDP fell for the second straight quarter, the components showed mixed signals. Personal consumption expenditures, the largest component (about 70% of GDP), increased 1% and has not fallen since April of 2020. Real investment declined by 13% due both to a large decline in structures, both nonresidential (-11.7%) and residential (-14.0%). Government expenditures and investment contracted for the third straight quarter.
The second key piece of information, payroll employment, was released Friday morning and showed a very large increase in the number of jobs created in the U.S. economy, rising 528,000. This was much higher than many experts expected. In the Wall Street Journal survey, economists predicted an increase of about 258,000. Service-producing jobs grew 402,000.
Average hours of work remained at 34.6 for the third consecutive month. Average hourly earnings rose from $32.12 in June to $32.27. While average hourly earnings growth has been quite strong, real earnings have been eaten away by the larger increase in the CPI.
The Job Openings and Labor Turnover survey reported a slight decrease in job openings while the number of people unemployed fell 242,000. There are still nearly two job openings for every active job seeker. Moreover, the unemployment rate is pretty much as low as it has ever been since the 1950’s.
Initial claims for unemployment insurance rose slightly and have been trending up over the past month or so, and are now somewhat higher than pre-pandemic levels that were averaging closer to 220,000 per week.
So, where does all this leave us? It remains unclear whether the NBER will tell us in several months that we are in the throes of a recession. Yes, GDP has fallen in two consecutive quarters, however, the labor market continues to be quite strong.