Are we in a Recession?

It feels as though everyone has been on pins and needles, wondering when the U.S. will enter a recession but are we already in it? We set out to answer that question below and, perhaps more importantly, where the economy is headed.

If we are in a recession, we will likely see signs of stress across the economy. During previous recessions, businesses, stock prices, and the labor market have all suffered. For investors, times such as these mean slow growth and little or even negative returns. However, recessions also present opportunities for investors and businesses that could prosper in the future. 

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So, are we in a recession?

What Signifies a Recession?

By popular definition, a recession occurs when the country’s GDP—the value of all goods and services produced during a specific period—falls in two consecutive quarters. By this definition, the U.S. has already entered a recession. GDP fell in both the first and second quarters of 2022, by an annual rate of 1.6% and 0.6%, respectively.

However, according to the National Bureau of Economic Research (NBER), a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. According to this definition, the last economic recession occurred in the Spring of 2020 and was brief in duration, yet severe in depth and diffusion— which are three criteria the committee at the bureau uses to signify a recession.

Also, according to this definition, we are not currently in a recession. However, the committee waits until it is confident that a recession has occurred before announcing it.

What To Look Out For

While it may not be here yet (or officially), there is some indication that a recession is on the horizon. As the battle against high inflation rages on, the Federal Reserve is poised to continue to hike interest rates aggressively. The higher interest rates rise, the more difficult it will become to ward off a significant and widely spread decline in economic activity.

But there are other factors we can look at to determine where the economy is headed. As we already mentioned, the traditional definition of a recession is based on the contraction or expansion of GDP. According to estimates from the Atlanta Federal Reserve’s GDPNow tracker, the U.S. economy is expected to grow by an annual rate of 2.9% in the third quarter. If Q3 GDP numbers do reflect this expansion, it could mean the economy isn’t experiencing a significant downturn.

Other important factors the NBER looks at to determine economic cycles include real personal income, fewer transfers, nonfarm payroll employment, employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production. As of the most recent data available, retail sales changed by 0% in September, and industrial production fell by 0.2% in August. These mild changes, along with good employment data, don’t indicate a current economic recession.

Despite this data, the S&P 500 is still down more than 24% year-to-date, indicating that people believe things are going to get worse. While we may not know when the U.S. will officially enter a recession, you can be prepared by continuing to track these signals and investing in companies that can withstand a recession, should the U.S. enter one soon.