Ecoinometrics - Is the US in a recession?

Let’s answer that question by comparing the current economic situation to past recessions.

Macroeconomic indicators are either forward looking or lagging. The “official” economists, those working at the Federal Reserve, typically only care about the lagging metrics.

That’s why when you and I see an inverted yield curve or a plummeting PPI we immediately think recession while the Fed speaks softish landing.

While it seems extremely likely that we are walking into a recession, the question is, are we already in an “official” recession?

Let’s have a look at what the data says.

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Is the US in a recession?

When you see this kind of inversion of the yield curve your spider-sense should be tingling…

The inversion of the yield curve has pretty much a 100% track record of being a harbinger of recession. 

However as many have pointed out, there is no causal relationship between the inversion events and the economic downturns. The yield curve tells us that the bond market is anticipating a recession in the near future. That’s not the same thing as causing it. 

So obviously the bond market could be wrong. 

The general definition of a recession is a period of decline in the economic activity of a country. 

But you and I can’t just declare that we are in a recession. This is a job left to professional economists.

In the US the National Bureau of Economic Research is the institution in charge of officially declaring when a recession starts and ends. 

Their criterion for a recession are a bit more specific than a simple economic decline. To get a recession you need:

• A significant decline in activity spread across the economy.

• This decline must last more than a few months.

• This decline must be visible in the real GDP, real income, employment, industrial production and wholesale-retail sales metrics.

Alright. So let’s look at those metrics to figure out whether or not the US is already in a recession.

We are looking for a significant decline lasting more than a few months. Let’s try to clarify what that means.