Dallas Fed: U.S. Likely Didn’t Slip into Recession in Early 2022 Despite Negative GDP Growth

[lalagata]

https://www.dallasfed.org/research/economics/2022/0802

Inspecting Individual Recession Indicators

The NBER committee’s indicators used to date business cycles include real (inflation-adjusted) personal income minus transfers, nonfarm payroll employment, employment as measured by the Bureau of Labor Statistics household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes and industrial production.

The gray lines in Chart 1 show the movements of nonfarm payrolls and industrial production in each previous business cycle relative to the peak of that cycle (month 0 = 100); the average across all previous cycles is the black line. The 2020 COVID-19-induced recession is excluded because its cause, scale and timing were extremely atypical. The red line is the indicator’s movement between June 2021 and June 2022 relative to the level in December 2021.

The data show that employment in the overall economy and output of the industrial sector in 2022 have significantly outperformed what occurred during every previous recession at a similar point. Chart 2 repeats this exercise for an alternate source of employment (surveying households rather than businesses) and for manufacturing and trade sales.

While these indicators in 2022 (red line) are not as starkly above the gray recession lines as the indicators in Chart 1, their paths remained at the higher end of the distribution and were notably higher than the corresponding average recession paths. These indicators are also more volatile than their counterparts in Chart 1, with a wider range of recessionary outcomes.

Finally, Chart 3 shows a similar pattern as Chart 2 for real consumption and real personal income excluding transfers.

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Low Unemployment Rate Is Also Argument Against Recession

While not listed among the indicators considered by the NBER committee, the unemployment rate is also among the indicators pointing to labor market strength through the first half of 2022 (Chart 5, Panel B). It has declined from 3.9 percent in December 2021 to 3.6 percent in March 2022, where it has held steady through June. By month six, every other recession incurred an unemployment rate increase of at least 0.3 percentage points.

Increases in unemployment may also better match conceptually what is generally understood to mean a recession—an increase in slack or underutilization of resources rather than a decline in economic activity. As trend GDP growth slows due to aging demographics and slower productivity gains, there may be more frequent periods of negative GDP growth without an increase in unemployment, making the distinction between increasing slack and declining activity more relevant than in the past.

Click the link, they’ve got pictures too!

 

[skim]

@lalagata Personal take: The crazy churn in employment has decreased overall efficiency and is now taking a toll on output. I suppose that is a weird type of under utilization itself.

I can see both sides of the "is it a recession argument". IMO, its most likely the beginning of a recession/very low growth period more than a current recession. Overall balance sheet strength still might sustain the consumer long enough to "soft-ish" land.

 

[calape52]

@skim That is probably true in the short term but the churn could also produce more efficient labor allocation which would raise output in the medium term.

 

[lalagata]

@skim Output remains strong in current dollars, the price adjustments make it negative in real terms.

 

[skim]

@lalagata This is not the environment to use nominal numbers for anything. At work, we are starting to compare unit volume side by side with $ change way more closely than we used to because the numbers have gotten too noisy.

 

[lalagata]

@skim Erm, you’d want to do both so that you have a full understanding of what’s driving change. This is why the GDP report has both current dollar output growth as well as price adjustments.

For instance current dollar growth was 7.8% with a price adjustment of 8.2% resulting in negative real growth. If one ignores how you arrive at the calculation they could make incorrect assumptions.

 

[modsquad]

@lalagata Nominal values never matter. Growth is contracting if it's falling in real terms. Businesses and consumers alike are not doing better if they are making lower profits/wages in real terms. I don't know why this is such a hard topic for Redditors to understand.

 

[resjudicata]

@skim Personally, I expect actually a high growth period starting now through, about 2030. People are well motivated due to inflation, same thing happened post 1915 pandemic, and the fact that all this churn has a lot of people in new roles for both leadership and workers. That should help them all to find new ways to organize work more efficiently. It'll take a year to get started but should improve a lot as they all get up to speed. The churn will stop soon enough.

 

[skim]

@resjudicata I don’t think you avoid a recession just because people are motivated somehow by inflation. That wasn’t the way the 1970s worked either.

I also don’t think that a comparison to the 1915 World War I economy makes sense here. Even if you are talking more 1920 (the flu pandemic was 1918-1921) you would have the return of the troops and release of wartime control confounding growth number in a way that won’t apply here.

In fact an explosion of labor supply to stimulate growth is almost the opposite of current events.

 

[resjudicata]

@skim Gotcha, well post pandemic, a surge of immigrants is likely, and yes a wartime economy is kinda where Ukraine and Taiwan might get us here real soon.

But yeah good points, only the churn=innovation one I can really stand by

 

[skim]

@resjudicata The war stuff is highly speculative, and I don't see how it could be considered base case. The general political environment in the US is not very pro-immigrant right now (to our discredit IMO).

For innovation, I actually agree with that generally, but once you hit 20%+ turnover you spend more time on boarding and process stabilizing than doing your job and making actual process improvements. It feels like many companies are on that part of the curve.

 

[msallyjm]

@lalagata OP has some great discussion points in the thread and cannot disagree with the data. My only problem is Fed officials and NBER dating committee rely on lagging data to determine a recession and doesn't happen until long after the actual event so does it really matter for investment decisions? Just like people love to hate on the Fed for being slow to react or being behind the curve - their job is literally to assess coincident and lagging data to fulfill their mandates - we don't want our central banks getting into the forecasting business when setting policy. We can all look at leading, coincident, and lagging indicators and get a feel for where things are trending, and we don't base investment decisions on what's happened - it might play in as a puzzle piece for expectations or to construct a trend.

Is it also not possible that just because we've never seen a recession where the labor market remains stronger for longer that we can't see one like that? What if real wages continue to decline while inflation persists? What if the labor market remains strong even as general activity decelerates? What if the consumer continues to weaken without material net job losses? This cycle may not fit into the neat, back-tested guardrails that we've developed - it already doesn't look quite like anything we've seen before so how can we apply our perceived knowledge of what a recession "should" look like? And how much weight should be put on a governmental body coming out with a piece like this? Would they ever come out and say we've likely entered a recession before it's determined? Doubt it - they shun GDP growth when it's falling and chalk it up to demographics but don't mind citing it when it's high....now unemployment is more important of course...quite convenient.

Edit: Not at all saying NBER should be calling these things in the moment, but if we know precision, not timeliness is the goal, then we know it's useless for investment decisions and why would Dallas Fed be trying to front-run this and basically tell everyone we're not in a recession? That shouldn't be their concern and they should know they can't make these calls in the moment. The optics just seem like they're going out of their way to explain away the contracting economy.

 

[joyjoy1001]

@lalagata Oh joy. Another round of arguing whether an arbitrary term should be applied or not, as if that decision is of critical importance as opposed to being a meaningless partisan talking point. I can't wait.

 

[lalagata]

@joyjoy1001 Its actually a collection of several data points indicative of economic health and trajectory. Maybe I’m missing something but I did not get any partisan vibe here, just discussion of methodology and trends among various aspects of the economy.

 

[joyjoy1001]

@lalagata Oh, totally, I think looking at the underlying data is really interesting. But whether that leads to an official "recession" or "no recession" is not especially important. And yet, every single time the issue comes up, the comment threads devolve into partisan flame wars.

So I'm not knocking you specifically - I'm just girding myself for how the comments here are going to go.

 

[lalagata]

@joyjoy1001 I’d assume that has a lot more to do with the average redditor not really understanding economics but definitely having an opinion on political than anything else, unfortunate as it is.

 

[joyjoy1001]

@lalagata Your assumption is absolutely correct - people like to turn a complex topic like the economy into a simple political narrative.

 

[lalagata]

@joyjoy1001 And here the top comment chain is a guy complaining that we might get a political take, while ignoring the actual content of the article. I guess conversation is doomed on Reddit regardless.

 

[joyjoy1001]

@lalagata Fair point! But it starts with the headline here (and your subject), which also makes it seem like the important question here is the 'recession or not' dichotomy, rather than all the interesting trends that underpin that information.

Maybe I'm being too quick on the trigger here, but I have seen a lot of useless arguing over the specific question "are we in a recession or not." Democrats making a big deal over the fact that we might not technically be in one. Republicans screaming that we had 2 quarters of negative growth. Democrats trying to make it a more nuanced conversation. Republicans screaming about Orwellianism. It gets old.

 

[lalagata]

@joyjoy1001 I suppose it was too much to ask that people just read an article before posting.