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How can you know when a recession has started?

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WASHINGTON — It became harder to give an answer on Friday as to whether the US economy is headed for recession.

The staggering strength reveals that the cornerstone of the economy remains strong. The economy’s output has contracted through the first half of this year, and rising interest rates have weighed on housing and other industries, even as inflation is at its worst pace in 40 years. All the confusing numbers only make the long-term outlook for the economy more vague.

On the one hand, two consecutive quarters of contraction in the economy has long been the unofficial definition of a recession. Just two years after the pandemic-induced recession officially ended, we are seeing a sharp turnaround. But will there really be a recession when so many people still have jobs and are making more money?

This has baffled Federal Reserve policymakers and many economists since COVID-19 struck in March 2020, suddenly unemploying 20 million Americans and halting growth. It’s the latest economic conundrum.

Most economists and Fed Chairman Jerome Powell say they don’t think the economy is currently in recession, but Friday’s data backs up many’s claims, but it’s likely to come later this year or next year. Expectations are still high that a recession will begin in

Friday’s strong jobs data could actually make a recession more likely. This is because the Federal Reserve may continue to aggressively raise interest rates to keep inflation in check. Rising interest rates have made homes, cars, and things purchased with credit cards more expensive, slowing the economy, and the Fed is raising interest rates at the fastest pace since the early 1980s.

Perhaps more important than whether there will be a recession is whether workers’ salaries will keep up with inflation. So far, there has been no increase in average wages, and the pain is disproportionately hitting low-income, black and Hispanic households. As a result, Americans are getting worse and worse.

It may be what drives more people in November’s midterm elections than whether or not the recession has officially begun.

So how do we know exactly when the economy is in recession? Here are some answers to such questions.

Who decides when a recession started?

The recession has been officially declared by the National Bureau of Economic Research, a group of economists who define a recession as “a significant decline in economic activity that spreads across the economy and lasts for more than a few months.”

The commission considers employment trends as an important measure in judging recession. It also evaluates many other data points such as income, employment, inflation-adjusted spending, retail sales, and factory output. It focuses on measures of employment and inflation-adjusted earnings that exclude government-supported payments such as Social Security.

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However, the NBER typically does not declare a recession until well after the recession has begun, sometimes up to a year. Economists consider the 0.5 percentage point increase in the unemployment rate over several months to be the most reliable sign of a recession in history. The unemployment rate hit its lowest level in more than 50 years, according to the latest employment data on Friday.

Are Two Quarters of Recession Equal to a Recession?

This is a general rule of thumb, but not an official definition.

Still, it’s been a useful tool so far. Right-wing American Enterprise Institute economist Michael Strain points out that each of the last 10 times the economy has contracted for two consecutive quarters has seen a recession.

Still, even Strain isn’t convinced we’re in a recession right now. Like many economists, he said the underlying drivers of the economy – consumer spending, business investment and home buying – all grew in the first quarter.

Gross domestic product (the broadest measure of domestic production) fell at an annualized rate of 1.6% from January to March. This is due to temporary factors such as a sharp increase in imports and a decline in corporate inventories after the holiday season. Many economists expect the first quarter to be even positive once GDP is revised later this year.

“The basic story is that the economy is growing but still slowing, and that slowdown actually accelerated in the second quarter,” Strain said.

Do many people think a recession is coming?

Yes, because many feel the financial burden. Wage growth has lagged inflation for most people, and rising prices for essentials like gas, food, and rent are reducing Americans’ purchasing power.

Walmart recently reported that rising gas and food costs have forced shoppers to cut back on discretionary spending purchases such as new clothing. Walmart, the country’s largest retailer, has cut its profit outlook and said it needs to offer more discounts on items such as furniture and appliances.

Also, the Fed’s rate hike nearly doubled the average mortgage rate to 4.99%, sharply reducing home sales and construction.

Rising interest rates may also make businesses less willing to invest in new buildings, machinery and other equipment. Hiring will start to slow as companies cut back on spending and investment. Increased corporate vigilance against unfettered spending could eventually lead to layoffs. If the economy loses jobs and public unrest increases, consumers will spend even less.

Goldman Sachs economists say the Fed’s rapid rate hikes have raised the chance of a recession over the next two years to nearly 50%. And while Bank of America economists expect a “mild” recession later this year, Deutsche Bank expects a recession early next year.

What are the signs of an impending recession?

Economists say the clearest signs that a recession is underway are a steady rise in unemployment and a sharp rise in unemployment. Historically, the unemployment rate has risen by an average of 0.3 percentage points over the past three months, meaning a recession is imminent.

Many economists monitor the number of people seeking unemployment benefits each week, which indicates whether layoffs are getting worse. Averaged over the past four weeks, weekly claims for unemployment assistance have recently increased to over 250,000.

Are there other signals to look out for?

Many economists also monitor changes in interest payments or yields on various bonds for signals of a recession, known as an “inverted yield curve.” This happens when 10-year Treasury yields fall below short-term Treasury yields, such as 3-month Treasuries. that’s abnormal. Longer-term bonds typically pay investors a higher yield in return for binding their funds for a longer period of time.

An inverted yield curve generally means investors expect a recession and the Fed will be forced to cut rates. Inverted curves often precede recessions. Still, it can take 18 to 24 months from the yield curve inversion to recession.

For several weeks, 2-year Treasury yields have been above 10-year yields, suggesting the market is expecting a recession soon. However, many analysts say the 3-month yield versus his 10-year yield has a better track record for recession forecasts. These rates have not now reversed, although the gap has narrowed.

Will the Fed continue to raise rates as the economy slows?

Flashing economic signals, such as weaker growth due to strong employment, are putting the Fed in a tough spot. Chairman Jerome Powell wants a “soft landing” in which the economy slows job and wage growth sufficiently to return inflation to the Fed’s 2% target without triggering a recession.

But Powell acknowledges that achieving such results is becoming increasingly difficult. Russia’s invasion of Ukraine and his COVID-19 lockdown in China have pushed energy food prices higher and many manufacturing parts in the US.

Powell also said the Fed would continue to raise rates even in a weak economy if needed to keep inflation under control.

“Is there a risk of going too far?” Powell asked last month. “There are certainly risks, but I disagree that they are the biggest risks to the economy.

Christopher Lugerber AP Economics Writer