What Makes A Recession And Are We Heading For One?

For non-economists, a recession is a period of time where the economy drifts downward across all industries and measures of success. Typically, the United States acknowledges a recession when four main factors drop.

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What a recession is

Real gross domestic product, real income, production of goods, and retail sales levels. Historically, the National Bureau of Economic Research, a private non-profit, tracks these factors using data from the U.S. Bureau of Labor Statistics and the Federal Reserve.

To qualify as a recession, the drops have to continue over months.

During COVID-19, NBER's Business Cycle Dating, the system they use to report recessions, reported just one in 2020. From February to April, as the global pandemic kicked off and spread, NBER reported the recession had occurred. The last recession officially recognized by the non-profit was from December 2007 to June 2009, as the housing market collapsed.

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While the economy continues its downward trend, and some economists fear the advent of what's known as a deflationary spiral, the NBER has not yet reported another COVID-19-fueled recession.

But with the Federal Reserve set to raise interest rates again this month, the second time in 2022, a recession may not be far off the record books.

Let's look at the four big factors and travel back in time to see if we're heading into a full-on recession.

Real gross domestic product

The U.S. Bureau of Economic Analysis, part of the Department of Commerce, tracks gross domestic product. Real GDP is the inflation-adjusted measurement of how much all goods and services in the economy are worth.

In April, the BEA reported that America's GDP had dropped 1.4% in the first quarter of the current fiscal year. It was the first drop since Q2 of the 2020 fiscal year. Over the course of the pandemic, real GDP fluctuated but remained on a positive bend in terms of quarterly increases.

"The decrease in real GDP reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased," BEA reported.

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The report released April 28 was the first time an annual drop had been recorded, compared to the year before and in the same season. The bureau said the impact of COVID-19 was largely to blame for the decrease, as pandemic relief programs slowed down.

"In the first quarter, an increase in COVID-19 cases related to the Omicron variant resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country," BEA reported. "Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased as provisions of several federal programs expired or tapered off."

Real income

The latest real earnings report from the Bureau of Labor Statistics shows six months straight of declines in real average weekly earnings. Compared to base wages, which have increased, real earnings are how much employees actually take home.

Due to the rising costs facing consumers as a result of ongoing inflation, real average hourly earnings for all workers in the United States decreased 0.8% in March, the sixth month in a row where earnings declined. Only two months in the past year, from March 2021 to March 2022, had increased real earnings, July and September.

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"Real average hourly earnings for all employees decreased 0.8% from February to March, seasonally adjusted," according to BLS. "This result stems from an increase of 0.4% in average hourly earnings combined with an increase of 1.2% in the Consumer Price Index for All Urban Consumers."

The increased earnings did not offset the overall decreases as inflation and supply chain snarls pushed costs up amid the pandemic. Meanwhile, the March Job Openings and Labor Turnover report showed the number of separations, or retirements, quits, firings and layoffs, edged up.

Production of goods

The Federal Reserve shows that production of goods, the products we use or buy, is actually on the rise. The industrial production data from the Federal Reserve shows that despite a few slight declines, production of goods has been on a steady increase for more than a year.

The last notable decrease in production was in February 2021. There were two more subtle declines that the U.S. bounced back from in September and December last year. Overall, since the end of the last recorded recession in April 2020, the production index has mostly trended upward.

As of an April 15 report, the Federal Reserve Board of Governors reported production had continued to increase.

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"Total industrial production advanced 0.9% in March and rose at an annual rate of 8.1% for the first quarter. Manufacturing output gained 0.9% in March," the Fed report showed. "The output of motor vehicles and parts jumped 7.8%, while factory output elsewhere moved up 0.4%. The index for utilities increased 0.4%, and the index for mining advanced 1.7 percent. At 104.6% of its 2017 average, total industrial production in March was 5.5% above its year-earlier level."

Production levels reported in the INDPRO Total Index used by the Fed were above the pre-pandemic rates.

Retail sales

Retail sales levels and prices in the U.S. are tracked by the Census Bureau. The monthly estimates reported by the Census Bureau were last published and revised on April 25.

Data from the Census showed overall, sales were up. The number of retail sales in February 2022 was lower than January, but sales rose significantly in March. The sale trends were similar in industries across the market, including food, motor vehicle parts, gasoline and furniture were all up in the past month.

However, some of the higher values, measured in dollars by the Census, were due to inflation's increase on costs. Despite that, the number of sales also increased alongside the dollar values, as demand for goods went up.

Recession on the horizon

While the economy is not at a peak level on all fronts, especially compared to before the pandemic, data from the Federal Reserve, BEA, Census Bureau and BLS shows that not all of the factors that point to a recession have hit.

Personal income has increased due to higher wages but so have expenditures for personal consumption, as reported by the BEA's Personal Income and Outlays for March. Real disposable personal income decreased 0.4% while Real PCE went up, meaning the PCE price index rose 0.9%.

However, taking away food and energy costs, price indexes only rose 0.3%, showing inflation's effect on fuel and food costs are the current largest factors hitting consumer wallets. While the data is not fully negative, BEA said the effects of COVID-19 on personal spending and earnings were difficult to fully measure.

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"The full economic effects of the COVID-19 pandemic cannot be quantified in the personal income and outlays estimate because the impacts are generally embedded in source data and cannot be separately identified," BEA said.

While the economy remains in flux, and inflation still rising, a recession could still be on the horizon but it's not here quite yet.