How the US economy is losing momentum
Reuters market analyst John Kemp assesses how the U.S. economy, while not exactly in recession, should be careful…
Like US Supreme Court Justice Potter Stewart’s famously flexible definition of obscenity („I know it when I see it”) Recessions are more difficult to define precisely.
Observers often disagree about whether the economy is already in recession, sometimes in recession, or whether there is a „soft coupling” to an otherwise unhindered business cycle expansion.
In most countries, recessions are informally defined as two quarters of negative growth in real GDP, although using GDP data has drawbacks because it is subject to substantial revisions.
In the United States, the National Bureau of Economic Research (NBER) defines recession more flexibly „A significant decline in economic activity would spread throughout the economy and last for more than a few months.”
The definition emphasizes three characteristics—depth, spread, and duration—that distinguish between recessions and moderate recessions in the entire economy or cyclical downturns in only one or a few sectors.
In practice, the NBER’s Business Cycle Dating Committee has become the accepted arbiter of recessions, using various indicators to determine when a recession occurred.
„Because a recession in the economy should have a broad influence and not just one sector. Emphasizes economic scale measures of group economic activity. NBER explains on its website.
These measures include personal income less transfer payments (PILT), non-farm wage employment, household employment, real personal consumption expenditures and industrial production.
Even with this set of indicators, the NBER often determines that the economy experienced a recession a few months after it began.
at the door
Based on the latest data, the US economy is currently poised on the threshold between a significant mid-cycle soft patch and a proper cycle-end recession.
The industrial side of the economy, which includes the manufacturing and freight transport sectors, is already in a significant and protracted recession, and may be on the verge of a recession.
Monthly trade surveys show output will contract from November 2022, and the decline is underpinned by declines in cargo containerships, diesel consumption and industrial electricity sales.
But the same surveys show that the much larger services sector is still reporting modest growth, keeping the overall economy out of recession.
Chart: US Economic Indicators
The Institute for Supply Management’s (ISM) service sector index was 51.9 in April (more businesses are reporting expanding activity than contracting) compared to a manufacturing index of just 47.1.
The difference between the fields is smaller than it seems: The services index is generally higher than its manufacturing counterpart throughout the economic cycle, but the two move broadly in the same direction.
In April, the ISM services index was in the 15th percentile for all months since 1997, compared to only the 9th percentile for the manufacturing index.
If the manufacturing sector has already fallen into recession, the service sector is now avoiding it.
Income and employment
So far, growth in consumer spending has helped offset a sharp decline in business investment and efforts to reduce excess inventory by suspending or reducing new orders.
As a result families were able to spend Income gains from rising employment, cost-of-living adjustments in wages and salaries, and tax cuts.
Real per capita income less transfer payments rose 1.7% in the first three months of 2023, a significant acceleration from 0.3% in the second quarter of 2022 compared to the same period a year earlier.
Despite inflation, real PILT gains coupled with a shift in spending from merchandise to services following the end of the pandemic and movement restrictions have given some parts of the services sector a boost.
Reduced prices for gasoline have eased some of the pressure on household budgets, and employment in both the manufacturing and service sectors is still growing, albeit at a slower rate of growth, supporting incomes.
At the same time, interest rates are still rising and credit conditions are set to tighten for households and firms following the regional banking crisis.
Slopes as stories
More informally but fundamentally, economist Robert Shiller has compared recessions to „stories” that spread like an epidemic through the economy („Story Economics”, Shiller, 2017).
„A recession is a time when many people decide to spend less, to make do with old furniture instead of buying new, or to postpone starting a new business, to postpone taking on new help in an existing business.”
Certain narratives associated with the recession have become more common over the past nine months, Predicts further slowdown in the business cycle.
Many major companies focus on efficiency, cost control and margins rather than growth. Investment is falling and layoffs are becoming more common in some sectors of the economy.
A strong area of the economy is the increase in non-agricultural employment. But even here gains are slowing and there are signs the labor market is starting to cool.
The number of first-time jobless claims each week began to rise from a multi-decade low in the third quarter of 2022.
While a more cautious approach to spending for an individual household or organization is rational, in aggregate it is recessionary.
In recent decades, recessions and mid-cycle soft bonds have typically prompted central banks to lower interest rates to stimulate more spending.
But with decades of low unemployment, rising employment costs, and low spare capacity in the economy, Central bank policymakers will prioritize inflation control over supporting growth.