How do we know when failure has begun?

WASHINGTON – Whether the U.S. economy is headed for a recession proved difficult to answer Friday, after a report showed employers hired hundreds of thousands more workers last month than expected.

The impressive strength made it clear that the linchpin of the economy remains strong. That’s despite inflation hitting its worst level in 40 years, economic output slowing in the first half of the year and rising interest rates dragging on housing and other industries. All the confusing numbers make the long-term outlook for the economy even muddier.

On the one hand, two straight quarters of recession is the definition of a prolonged, albeit informal, recession. Two years after the official collapse of the epidemic, it shows a rapid turnaround. But can a recession really happen when so many people still have jobs and earn so much money?

In the year It’s the latest major challenge to the economy, which has embarrassed the Federal Reserve policymakers and many economists since growth stalled in March 2020 when Covid-19 hit and 20 million Americans were suddenly out of work.

Most economists — and Fed Chairman Jerome Powell — don’t think the economy is in recession right now, and while Friday’s data reinforced the case for many, expectations for a recession this year or next are still high.

Friday’s strong jobs report could increase the chances of a recession as it encourages the Federal Reserve to remain bullish on interest rates to beat inflation. Higher rates slow the economy by making housing, cars, and goods bought with credit cards more expensive, and the Fed is hiking at its fastest rate since the early 1980s.

Perhaps even more important than a recession is the fact that workers’ wages keep pace with inflation. So far, there has been no increase in average wages, and the pain is hitting low-income and black and Hispanic families. As a result, the American economy has been declining.

That’s probably what got a lot of people excited about whether or not the recession officially started in November’s midterm elections.

So how, exactly, do we know when an economy is in recession? Here are some answers to such questions:

Who decides when a recession begins?

A recession is officially declared by the vaguely vocal National Bureau of Economic Research, a group of economists who define a recession as “a significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.”

The committee considers employment trends as a key metric in determining recession. It also evaluates a number of other data points, including measures of income, employment, inflation-adjusted spending, retail sales and factory output. It shows inflation-adjusted earnings with a heavy weight on jobs, excluding government support payments like Social Security.

However, the NBER usually does not declare a good failure until after one has started, sometimes for up to a year. Economists consider a half-point increase in the unemployment rate to be a sign of a reliable decline from the historical average over several months. On Friday, the latest jobs report showed that the unemployment rate tied with the lowest level in more than 50 years.

Do two straight quarters of economic contractions trigger a recession?

That’s a common rule of thumb, but not an official definition.

Still, in the past, it is an important measure. Michael Strain, an economist at the right-wing American Enterprise Institute, says the economy has contracted after two consecutive quarters of contraction in the past 10 years.

Still, even Strain isn’t sure we’re in poverty right now. Like many economists, note that the main drivers of the economy – consumer spending, business investment, home purchases – all grew in the first quarter.

Gross domestic product – the broadest measure of the nation’s output – fell at an annualized rate of 1.6% from January to March, due to one-time factors, including a sharp jump in imports and a post-holiday drop in business inventories. Many economists expect that when GDP is revised later this year, even the first quarter could be positive.

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

Don’t most people think a recession is coming?

Yes, because many people feel more financially burdened now. While wage increases have followed inflation for most people, higher prices for essentials like gas, food and rent have eroded Americans’ spending power.

Walmart recently reported that higher gas and food costs have forced shoppers to cut back on must-have purchases like new clothes, a clear sign that consumer spending, a key driver of the economy, is weakening. Walmart, the nation’s largest retailer, has cut its profit outlook and said it will have to discount more items such as furniture and electronics.

And the Fed’s rate hikes doubled the average mortgage rate to 4.99 percent, causing a sharp drop in home sales and construction.

Higher rates can weigh on businesses’ willingness to invest in new buildings, machinery and other equipment. If companies cut spending and investment, they will also start hiring. Increased caution among companies at the expense of free will ultimately lead to layoffs. If the economy loses jobs and the public becomes more fearful, consumers will cut back on spending more.

Goldman Sachs economists said the Fed’s rapid rate hike raised the chance of a recession in the next two years to 50%. And while Bank of America economists predict a “mild” recession by the end of this year, Deutsche Bank expects a recession early next year.

What are some signs of an impending recession?

Economists say the clearest sign that an economic downturn is underway is rising job losses and unemployment. An average increase of three-tenths of the unemployment rate in the last three months means that an economic recession will follow in the near future.

Many economists monitor the number of people seeking unemployment benefits every week, which shows that unemployment is increasing. The average weekly jobless claims for the past four weeks have been rising recently, topping 250,000. While this may be indicative, it is still a historically low level.

Are there other symptoms to watch for?

Many economists monitor changes in interest payments or yields on various bonds for a sign of decline known as the “inverted yield curve.” This happens when the yield on the 10-year Treasury falls below the yield on a shorter-term Treasury, such as the 3-month T-bill. That’s unusual. Typically, long-term bonds pay investors a better yield by tying up their money for a longer period of time.

Inverted yield curves generally indicate that investors are anticipating a recession that could force the Fed to taper. Inverted curves often precede failure. However, after the yield curve inverts, it can take 18 to 24 months for a recession to occur.

For weeks, the two-year Treasury yield has risen above the 10-year yield, suggesting markets expect an imminent fall. But many analysts say that comparing the 3-month yield to the 10-year has a better track record of predicting recessions. Although the gap has narrowed, those rates have now not reversed.

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

Flickering signs of the economy – with strong employment growth slowing – put the Fed in a difficult position. Chairman Jerome Powell is looking for a “soft landing,” a time when the economy has weakened enough to slow hiring and bring wage growth back to the Fed’s 2% target without recession and inflation.

But Powell is becoming more and more difficult to achieve such a result. Russia’s invasion of Ukraine and China’s COVID-19 lockdowns have boosted prices for energy food, and many parts produced in the US.

Powell indicated that the Fed would raise rates even in a weak economy if necessary to curb inflation.

“Is there a danger of going too far?” Powell asked last month. “There is definitely a risk, but I don’t agree that this is the biggest risk to the economy. The biggest mistake… is the failure to restore price stability.

By CHRISTOPHER RUGABER AP Economics Writer