{"id":144295,"date":"2022-08-19T13:11:53","date_gmt":"2022-08-19T19:11:53","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=144295"},"modified":"2023-08-08T14:45:05","modified_gmt":"2023-08-08T20:45:05","slug":"we-are-not-in-a-recession-but-on-the-verge","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/we-are-not-in-a-recession-but-on-the-verge","title":{"rendered":"We&#8217;re Not In a Recession, We&#8217;re On The Verge of One. But Who Cares?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC6761117443&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">There\u2019s lots of talk these days about whether we\u2019re in a recession or not. This has been muddied by the fact that the Biden Administration has made an official declaration that this determination is based on a vote by the National Bureau of Economic Research (NBER), not the more popular rule of \u201ctwo successive negative quarters of GDP.\u201d<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">As usual, I will not get political, but I will say that I thought the White House issuing that statement was a bad move, as it simply continues to polarize the country. But, ignoring the fact that the administration messed up by making the statement, it\u2019s still worth digging into whether the statement is true and what it means for where we are economically, both from a technical standpoint and a realistic standpoint.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How Are Recessions Determined?<\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Let\u2019s start with the question of how and by whom recessions have traditionally been determined, and from there, we can jump into whether I think we\u2019re currently in a recession.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Yes, NBER is the organization that has historically been the final arbiter of when a recession starts and ends. They have been dating recessions since the late 1920s and created their recession dating committee in 1978. So, they\u2019ve been doing this for nearly a century and formalized the process nearly half a century ago.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">They are a non-partisan organization (I\u2019ve never heard any suggestion from either party they weren\u2019t) and has a group of bi-partisan economists who meet whenever they feel it&#8217;s necessary to make determinations, such as whether we\u2019re currently in a recession, where the trough of the recession was, or whether a recession has ended.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you use the FRED (St. Louis Federal Reserve) website to track economic data, you\u2019ve probably noticed that there are gray vertical bars throughout all the graph timelines that denote recessions. These grey bars\u2014including where they start and end\u2014are determined by NBER.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Now, you might ask, &#8220;if they don\u2019t use two consecutive negative quarters of GDP, how do they determine if we\u2019re in a recession?&#8221;&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Well, it\u2019s a bit more nuanced than any single piece of data (as it should be). Their official criteria for a recession is \u201ca significant decline in economic activity that is spread across the economy and that lasts more than a few months. The committee&#8217;s view is that while each of the three criteria\u2014depth, diffusion, and duration\u2014needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.\u201d<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But, here&#8217;s the important point:<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">NBER doesn\u2019t attempt to make real-time calls on recessions. It often takes them months or even longer to make a declaration, as they view their job to historically document economic events, not to call them as they happen. For that reason, the media has gotten comfortable using the \u201ctwo successive quarters of negative GDP\u201d rule to avoid waiting for NBER to make a determination.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This leads to the obvious question:<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Has NBER\u2019s definition of recession ever deviated from the \u201ctwo successive quarters of negative GDP\u201d definition?<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The answer is yes. In fact, it\u2019s happened in two of the past three recessions. In 2001, we saw negative GDP in Q1 and Q3, but not Q2, so we never had consecutive quarters of negative GDP in 2001. But, a recession was declared. During the Great Recession, NBER called a recession starting in December 2007, despite the fact that we didn\u2019t have two consecutive negative quarters of GDP until the end of 2008. Neither of these recessions were officially declared based on two successive quarters of negative GDP.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">To finish up an earlier point I was making, NBER often doesn\u2019t meet until well after we start to see recessionary effects on the economy. In many cases, it will declare a recession or a trough well after the occurrence. This makes sense, as it\u2019s often difficult to observe economic shifts in real-time simply because we don\u2019t get economic data in real estate. It can take weeks, months, or even several quarters to get historical data and to put the pieces together to determine exactly what happened in the past.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">All that said, I\u2019m perfectly comfortable allowing NBER to ultimately declare recessions, as they&#8217;ve been pretty good about it in the past and, with the exception of the misstep by the current administration, there\u2019s never been any partisan push-back from either side.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Which leads us to this question: Does an official declaration of a recession even really matter?&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">\u201cRecession\u201d is just a word and it doesn\u2019t change any official policy. Isn\u2019t it more important to have a handle on how the economy impacts the people and the businesses in this country so that we can adjust our financial decisions, regardless of whether an official recession has been declared?<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I believe so, and I would look at a number of factors to make a personal determination of whether or not we should be considering the U.S. as currently in a recession.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Gross Domestic Product (GDP)<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Let\u2019s start with the one everyone likes to look at: GDP. While I\u2019m a big fan of looking at GDP numbers to determine the health of the economy, it\u2019s important to be aware of situations where the numbers may not be fully representative of the current state of the economy. For Q1 and Q2 of this year (both negative GDP), there were a couple of idiosyncrasies in the data worth noting.<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1168\" height=\"450\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-16.png\" alt=\"\" class=\"wp-image-144298\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-16.png 1168w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-16-300x116.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-16-1024x395.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-16-768x296.png 768w\" sizes=\"auto, (max-width: 1168px) 100vw, 1168px\" \/><figcaption class=\"wp-element-caption\"><em>Percent Change of Real GDP (2017-2022) &#8211; <a href=\"https:\/\/fred.stlouisfed.org\/series\/GDPC1\" target=\"_blank\" rel=\"noreferrer noopener\">St. Louis Federal Reserve<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p><span data-preserver-spaces=\"true\">First, thanks to supply chain issues in 2021, many businesses stocked up on inventory in Q4 last year, spending a ridiculous amount of money to pack their warehouses. This led to GDP growth to the tune of 6.9% during Q4, the second highest since the Great Recession. But, with warehouses packed with inventory, businesses haven\u2019t had to spend nearly as much money in the first half of this year and that reduction in business spending accounted for a large amount of the GDP drop between Q4 last year and Q1\/Q2 this year.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Second, trade plays a big part in GDP. Exports boost GDP numbers. Imports hurt GDP numbers. Thanks to a historically large trade imbalance since mid-2020 (and hitting its peak in March of this year), GDP has looked worse than it normally would with more typical trade imbalances. While heavy importing isn\u2019t indicative of a weak economy (just the opposite, in fact), it hurts GDP and makes the economy look weaker than it otherwise would.<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1168\" height=\"450\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-17.png\" alt=\"trade balance\" class=\"wp-image-144300\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-17.png 1168w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-17-300x116.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-17-1024x395.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-17-768x296.png 768w\" sizes=\"auto, (max-width: 1168px) 100vw, 1168px\" \/><figcaption class=\"wp-element-caption\"><em>Trade Balance (1992 &#8211; 2022) &#8211; <a href=\"https:\/\/fred.stlouisfed.org\/series\/BOPGSTB\" target=\"_blank\" rel=\"noreferrer noopener\">St. Louis Federal Reserve<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p><span data-preserver-spaces=\"true\">So, when it comes to GDP, yes, we\u2019ve seen two successive quarters of negative growth. But, had just the two factors I mentioned above been normalized, it\u2019s nearly certain that GDP would have been positive in both Q1 and Q2 of this year.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Unemployment<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">This is probably the most important metric to look at when it comes to economic health simply because it\u2019s the most indicative metric of the financial stability of Americans. While it may change soon, there is no argument that employment metrics continue to look strong.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The most common unemployment metric, U3 unemployment, is sitting at 3.6%, the same as the historic lows we saw just before the pandemic began. The total number of unemployed people looking for work sits at about 5.9 million. Again, near historic pre-Covid lows. While unemployment claims have ticked up in the past few weeks, 1.6 million claims are still near the historic pre-Covid lows.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Long story short, while unemployment data has a lot of caveats in this post-Covid world, there\u2019s no situation in which we can say the current unemployment numbers aren\u2019t still very strong.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Inflation<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">While high inflation is certainly a major pain point for both consumers and businesses, it\u2019s actually an indication of an economy that hasn\u2019t yet weakened.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Don\u2019t get me wrong\u2014the increase in interest rates is likely to drive inflation down and take the economy with it\u2014but this hasn\u2019t happened yet. The big question remains about whether inflation is mostly demand-side\u2014driven by strong consumer spending. Or supply-side\u2014driven by supply chain issues. I personally believe that we\u2019re still seeing major supply chain issues, which are leading to the spike in inflation, but many people will still argue that inflation is being driven by strong consumer demand.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If that\u2019s the case, this is actually an indication that we have not yet entered a recession and that consumers are still relatively healthy.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Yield Curve, Bond Rates, and Mortgage Rates<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">There are plenty of other economic metrics that we can look at to determine whether the economy is still holding up or whether we\u2019re in the midst of a downturn, and without going into too much boring detail, the takeaway is that things are still looking as if we haven\u2019t gone over the cliff.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The yield curve is flattened\/inverted, which is a bad sign. But, it\u2019s historically a sign of what\u2019s to come, not a sign of where we are today. Bond and mortgage rates are leveling and dropping, indicating that risk premiums are dropping, which is a sign of investor confidence. Not necessarily confidence that everything is peachy, but confidence that we aren&#8217;t going to face big surprises from the market or the Fed.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Consumer Sentiment<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The final metric I\u2019m going to touch on is consumer confidence. While I saved this one for last, in many respects, it\u2019s the most important. Not because it\u2019s necessarily an indication of what\u2019s going on in the economy, but it\u2019s an indication of what people&nbsp;<\/span><em><span data-preserver-spaces=\"true\">think<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;is going on in the economy. In many ways, that\u2019s more important than what\u2019s actually going on because consumer sentiment will drive consumer habits, which will determine where the economy is headed.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">So, where is consumer sentiment?<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In the toilet. Specifically, the worst we\u2019ve seen in the 45 years that the data has been tracked. June numbers were even worse than the depths of the 2008 recession. Again, while I would use this to determine the current health of the economy, it\u2019s definitely an indication of where the economy is headed and potentially how quickly.<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1168\" height=\"450\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-18.png\" alt=\"consumer sentiment\" class=\"wp-image-144301\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-18.png 1168w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-18-300x116.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-18-1024x395.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/fredgraph-18-768x296.png 768w\" sizes=\"auto, (max-width: 1168px) 100vw, 1168px\" \/><figcaption class=\"wp-element-caption\"><em>University of Michigan: Consumer Sentiment (1978 &#8211; 2022) &#8211; <a href=\"https:\/\/fred.stlouisfed.org\/series\/UMCSENT#\" target=\"_blank\" rel=\"noreferrer noopener\">St. Louis Federal Reserve<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Conclusion<\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">So, would I say that we\u2019re currently in a recession?<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Well, suppose you were to remove that last data point, consumer sentiment. In that case, I think it would be hard to argue that the economy is in a place where we could say that there\u2019s been a significant widespread decline in economic activity. In other words, not a recession.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But I would give that consumer sentiment metric a good bit of credence. With that number so strikingly low, I don\u2019t believe we\u2019re currently in a recession, but I would certainly consider that we are likely on the verge of one. We should assume that most Americans will start making financial decisions that would indicate we are in one.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Long story short, while we can argue all day about whether we\u2019re in a recession or not, there\u2019s little doubt that many Americans are getting ready to start acting as if we\u2019re in one.<\/span><\/p>\n\n\n\n<div id=\"hero-block_62ee867235a1c\" class=\"first:mt-0 hero-block py-4    has-background has-slate-300-background-color has-text-color has-slate-800-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-slate-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Prepare for a market shift<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px\">Modify your investing tactics\u2014not only to survive an economic downturn, but to also thrive! Take any recession in stride and never be intimidated by a market shift again with <em><a class=\"rank-math-link\" href=\"https:\/\/store.biggerpockets.com\/products\/recession-proof-real-estate-investing?utm_source=blog&amp;utm_medium=blog%20banner\" target=\"_blank\">Recession-Proof Real Estate Investing<\/a><\/em>.<\/p>\n\n\n\n<div id=button-custom-event-block_64138705d4d27 class='button-custom-event'>\n      <a href=\"https:\/\/store.biggerpockets.com\/products\/recession-proof-real-estate-investing?utm_source=blog&#038;utm_medium=marketing_block\" x-on:click=\"window.analytics.track(&#039;Blog Block | Publishing: Recession Proof Book&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/we-are-not-in-a-recession-but-on-the-verge&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Get Yours Now<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/04\/recession-proof.png\" alt=\"\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>There\u2019s lots of talk these days about whether we\u2019re in a recession or not. This has been muddied by the fact that the Biden Administration has made an official declaration [&hellip;]<\/p>\n","protected":false},"author":2444,"featured_media":144296,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4433,7119],"tags":[],"class_list":["post-144295","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144295","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/2444"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=144295"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144295\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/144296"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=144295"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=144295"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=144295"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}