The dreaded r-word (recession) is on the tip of everyone's tongues these days.
Morgan Stanley CEO James Gorman said this week that there was a 50-50 chance of the economy entering a recession, while Coinbase CEO Brian Armstrong said a recession is already here, as the crypto exchange laid off 18 percent of its staff Wednesday.
Others have been less direct but no less dour: JPMorgan CEO Jamie Dimon last month said a "hurricane" was coming, and Tesla CEO Elon Musk wrote in a memo that he had a "super bad feeling" about the economy. Even Cardi B chimed in.
Good question, Cardi. In the past, a recession was defined as two successive fiscal quarters of declining gross domestic product (GDP), and while this remains the conventional wisdom, that hasn't been the standard for at least a decade.
Back in 2008, as the Great Financial Crisis (aka The Great Recession) clobbered the U.S. economy, the National Bureau of Economic Research (NBER), the nonprofit tasked with determining when exactly a recession begins and ends, introduced a more open-ended standard.
"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales," it wrote.
In addition, NBER explained that a recession begins "after the economy reaches a peak of activity and ends as the economy reaches its trough." Between these two extremes, the economy is generally expanding, which is considered normal.
In other words, a recession begins when an economic expansion stops, and ends when the economy starts growing again.
That is admittedly a pretty flexible definition, but some economists argue this is necessary to account for the different kinds of economic downturns that can occur.
"I think there's actually more flexibility in determining a recession than most people understand, and that's appropriate because downturns can feel differently depending on the conditions," said Mark Hamrick, senior economic analyst at Bankrate, a consumer financial services company.
Others are more skeptical of the open-ended way recessions are defined.
"Recession is kind of a term of art more than it is science," said Luke Tilley, chief economist at Wilmington Trust, an investment firm. "I would argue that it's a little bit overblown in terms of actually defining a downturn."
He pointed out that NBER's designations are useful for research, but they're not particularly useful in the day-to-day trenches of financial markets.
Indeed, basic qualifiers like how long a downturn needs to last to qualify as a recession are fuzzy at best. NBER's rough standard is "more than a few months," but it very recently made an exception to its own rule based on other factors.
The pandemic-induced recession of 2020, for example, is the shortest on record. The NBER said the economic peak took place in February 2020, and the trough was in April 2020, meaning the recession lasted less than two months.
The organization recognized that the designation, which it made in 2021, went against its own standard, but concluded that the "unprecedented magnitude of the decline in employment and production" justified calling it a recession.
How does this help us figure out if we're headed toward a recession now? Not much, as we'll only know in retrospect how long a recession lasts.
As NBER points out, recessions are "rare" and usually "brief," but this also implies that we're working with a relatively small sample size.
In the 21st Century, there have been just three official recessions:
- March 2001 to November 2001 (the popping of the dot-com bubble)
- December 2007 to June 2009 (the Great Recession)
- February 2020 to April 2020 (Covid-19 recession)
The U.S. has suffered a total of 34 recessions since 1854, according to the NBER, and many of them began under very different conditions, but pretty much all of them led to a drop in employment, GDP, and consumer spending.
Between 2007 and 2009, for example, GDP fell 4.3 percent, which is the largest drop-off of the post-WWII era. The unemployment rate peaked at 10 percent in October 2009, and home prices fell on average 30 percent over the period.
In April 2020, the situation was even worse: Unemployment shot up to 14.8 percent, and GDP plummeted 31.7 percent in the second quarter of that year.
Right now, by comparison, the U.S. labor market is still booming. Unemployment is at 3.6 percent, and job openings remain at record highs.
Consumer spending has ticked upward in recent months, rising 0.9 percent in April, according to the Bureau of Economic Analysis.
GDP, meanwhile, has made sizable gains every quarter since the last recession ended in May 2020, with the exception of the most recent quarter, which saw a 1.5 percent drop — though this was largely due to a massive uptick in imports.
"We're still expecting GDP growth this year," said Tilley. "We expect to see a declaration in the inflation numbers, but if we don't see slowing inflation and the Fed continues along this path, we would move closer to a recession call."
Dan North, the senior economist at Allianz Trade, said the current job market only tells us so much though because it's a lagging indicator.
"The job market is the last thing to go," he said. "By the time you see an actual loss in jobs, you've been in a recession for a while, and I think that can happen fairly rapidly."
He added that consumer spending could drop off soon as well, as pandemic-era stimulus and savings are whittled down by higher prices.
"They are running out of ammunition," he said. "They had all these excess savings from all those fiscal stimulus programs. That's started to wear away, and now consumers are starting to go to credit cards as a result."
The personal savings rate is now below pre-pandemic levels, for instance, and a recent Federal Reserve study found that consumers in April racked up $38 billion in revolving and non-revolving debt. While that's not quite as high as the downwardly revised $47.34 billion spent in March, it's still well above the 2021 average.
Regardless of what economists think, consumers are definitely getting some bad vibes from the economy, which itself can affect economic conditions as people draw down their spending as they lose confidence in the future.
The University of Michigan's closely watched consumer sentiment index dropped to an all-time low of 50.2 in June, down 14 percent from the month prior, with consumers citing higher gas prices and product shortages.
So to answer Cardi B's question: we aren't likely to get a clear answer on whether a recession has started until it's already happening.