This column is one where I’m laying down a prediction. I believe we’re already in a recession. I could caveat that by saying, “or soon will be in a recession,” but I’ll stick with the hard-line prediction. The real questions are when does the National Bureau of Economic Research (NBER) backdate the start of the recession, and how long does it take for this one to end?
To understand this prediction, first, we need to walk through what a recession is and when does the NBER declare one? They say, “The committee’s approach to determining the dates of turning points is retrospective. In making its peak and trough announcements, it waits until sufficient data … it waits until it is confident that a recession has occurred.”
Recession declarations are always late.
A recession declaration is always late. By the time a recession is declared, we’ve already been experiencing a slump for some time. As an example, examine the Great Financial Crisis of 2007 and 2008. The NBER declared a recession on December 1, 2008. By that point, unemployment was rocketing, Lehman Brothers and Bear Stearns had liquidated, the Fed was panicking, and Congress had passed TARP to save the financial system.
The NBER backdated the start of the recession to the end of 2007. We spent the entirety of 2008 in a recession, with everyone suffering and no official declaration until the end of 2008. NBER would declare the recession’s end occurred a few months later in 2009.
To the NBER’s credit, they declared an early recession in March of 2020, noting correctly that the government-enforced shutdowns would cause a recession. But that was short-lived once the economy started re-opening in April of 2020. In that case, it was apparent what would happen with economic activity, and there was no need to wait.
Right now, the data is mixed. But it does point in one direction: recession. The NBER will be the last group to notice this, not the first. That’s by design, though. The NBER tells us what they know, as a doctor tells us what happened after an autopsy.
GDP growth is important.
The NBER says a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” As the Wall Street Journal notes, the classic definition of a recession is “two quarters back-to-back of negative growth” is not a recession. Though, that isn’t good.
But even though GDP growth in back-to-back quarters isn’t the definition of a recession, that data is still essential. In 2008, the first quarter experienced negative growth, the second quarter positive, and the third and fourth quarters were negative. The NBER declared a recession without seeing the fourth-quarter GDP report, released in January of 2009.
We’ve experienced one negative quarter of GDP growth in 2022. As Jim Geraghty at National Review observes, surveying the various GDP forecasts of the Federal Reserve Banks, second-quarter GDP growth is expected to be close to zero. Some estimates show some rays of light, but nothing in the underlying data is good.
Back-dating a recession.
We haven’t encountered the massive panic of 2007-2008, but we may be in the early stages of a recession. The NBER showed a peak of economic activity towards the end of 2007, and things started falling after that. When reading studies and surveys of that crisis, it’s typical for economists to see warning signs of a recession beginning in 2006 and continuing through to 2007.
My best-educated guess is that the NBER will eventually define the peak of our economic expansion post-COVID, to be somewhere towards the end of 2021. A more specific guess is that they’ll choose November 2021 as the peak, with things dropping from there. That’s when the Fed started getting sober about inflation and announcing a push toward rate hikes.
Economic growth has stagnated or declined ever since. Yes, we have robust job reports still. But those are lagging indicators. Because there is a labor shortage, it will take time for actual job shortages to occur because businesses still need labor to keep up with the slightly lower demand we have now.
The Fed has to break the economy.
When the Federal Reserve under Paul Volker sought to fix the ongoing inflation and stagflation crisis of the 1970s, he dramatically raised rates under President Ronald Reagan. Interest rates soared, and unemployment topped out at 10.8%. Reagan, in response, unleashed a barrage of supply-side policies that helped cool prices too. The combo of interest rates and supply-side policy helped slow inflation and unleashed economic prosperity.
The unemployment rate is 3.6% right now. The Federal Reserve is already starting to admit that we will need higher unemployment to cool inflation — they’ve targeted 4.1%. But rate hikes will have to cut into the plethora of job openings before raising the unemployment rate. In short, the Fed has to inflict much pain to reach its goal.
And if Volker needed 10.8% unemployment to cool the inflation of the Carter and Nixon years, odds are we’ll need something more than 4.1% to attack our inflation problem.
All that to say, I believe the Fed has already triggered a recession. The economy is slowing, and we’re well below the peak economic growth we experienced in November 2021. We’ll see if the NBER agrees with this assessment. But if they follow past behavior, we won’t know the official verdict until the entire government is already focused on trying to save the economy.