Wait, so is the U.S. in a Recession?

GDP, gross domestic product, explained by the Bureau of Economic Analysis, is a comprehensive measure of U.S. economic activity. Now, you might have heard GDP pop up in the news lately because in America, their GDP is currently shrinking. In Q1, U.S. GDP was falling at an annualized rate of 1.6%. Just last week, the BEA announced that in Q2, it looks like that downward trend is continuing. The advanced estimate for Q2 showed negative 0.9 percent for annualized GDP growth.

However, it is still worth noting that that figure does get refined over time to be more and more accurate, so it likely won't be the final number. But what it looks like at this stage, anyway, is that in America, GDP has fallen for two consecutive quarters. As a lot of you might know, that is the technical definition of a recession. So there you have it: the United States is in... hang on. People are saying that the White House has declared the U.S. is not in a recession. Apparently, they've changed the definition.

While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle. "What, it's always just been two negative quarters of GDP?"

"Hey, hey, Mish. How do you know if a country's in a recession? Isn't it just two consecutive quarters of negative GDP growth?"

"Yeah, Tom. What's all this business about America not being in a recession?"

"I don't know, man. Was there GDP growth positive this quarter?"

"I don't know. I think—um—I've been trying to..."

That's fine. The National Bureau of Economic Research Business Cycle Dating Committee, the official recession scorekeeper, defines a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months. Yet more than a few months? How about six months? Two quarters of negative GDP growth?

The variables the committee typically tracks include real personal income minus government transfers, employment, various forms of real consumer spending, and industrial production. "Man, that seems way too thorough for my liking."

No, but all jokes aside, a recession is not a label you just throw around lightly. And despite it being, you know, quite funny that the White House took the time to put out a press release saying it isn't about GDP literally a week before the lackluster GDP figure came out, they do have a point that a recession is a multi-factored economic situation.

In fact, there are a few signs that the United States is not in recession. So let's break this down. Really, a recession is just a period of sustained economic contraction. As the White House so conveniently described, the National Bureau of Economic Research defines a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months.

While GDP growth has been negative for the past six months, that's not all we have to look at. As they state, the variables the committee typically tracks include real personal income, minus government transfers, employment, various forms of real consumer spending, and industrial production.

So, as you might expect, in a recession, real personal income falls, unemployment rises as businesses struggle, and people get laid off. Consumer spending will fall as incomes reduce, and consumers have less cash to splash. Industrial production will suffer too as businesses cut way back. Seeing those four things is a pretty surefire bet that economic conditions are worsening and your country is in recession, but right now, that's actually not entirely what we're seeing in the United States, so let's dive a little bit deeper.

Firstly, the big one that's saying, "Yes, we could be in a recession," is economic output. As we discussed earlier, the U.S. GDP is shrinking right now, so the economic output is contracting. All signs point to a further slowdown in output. To make better sense of this picture, let's quickly refresh our memory of the expenditure view of GDP.

So, who are the players spending money in the U.S.? Well, there's expenditure from companies to grow and from people buying new houses—that's investment. Then there's the household consumption—so all the stuff people are buying day to day—that's C. Then there's government spending for, you know, the military and government jobs, etc.—that's G. And then there's all the stuff that foreigners buy from the U.S. But, of course, GDP does not include America's spending on products from outside the U.S. So we have to make sure we subtract the spending on imports.

So GDP goes up when, you know, companies invest and buy more stuff, when consumers spend more, when the government spends more, and when foreigners buy U.S. products. But it does not increase when Americans buy foreign products.

Okay, now take a listen to this statement from the Bureau of Economic Analysis on Q2's GDP figure: "The decrease in real GDP reflected decreases in private inventory investment, residential fixed investment, federal government spending, state and local government spending, and non-residential fixed investment that were partly offset by increases in exports and personal consumption expenditures."

So GDP was boosted by foreigners buying American products and by increased household expenditures, but government spending, investment spending, and particularly inventory spending reduced enough to more than outweigh those positives. And if we hone in on the reduction in inventory spending, this essentially means that businesses are overstocked right now and struggling to move their products. Thus, they're spending less on inventory replenishment, and that will slow manufacturing.

"What we do see in these earnings results is that we are in a recession, and we've been calling for a recession for quite some time, a lot of it based on excess inventory. So we think this is an inventory-led recession."

This observation is very consistent with what retailers like Walmart have been saying recently. In their Q2 earnings release, Walmart stated that "the high inflation is causing consumers to focus only on the bare necessities." For them, that's led to too much stock in product categories like apparel. Thus, instead of adding more stock, they're pulling way back on their orders and slashing prices to get rid of it.

Now, Walmart is just one example, but if you apply this across the board, what it ultimately means is less orders for new stock, and manufacturing drops. That's exactly what's happening. Reuters notes the ISM's index of national factory activity dipped to 52.8 last month, the lowest rating since June 2020 when the sector was pulling out of a pandemic-induced slump. The PMI was at 53 in June. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy.

So manufacturing is technically still expanding, but now at its slowest rate since the pandemic slump, indicating that the huge spike in demand seen over the last few years is coming to an end. So while economic output holds up for the moment, definitely watch this space in Q3 and Q4.

So that's the story of economic production, but what about the other three factors? Let's now move on to personal income. When it comes to real income—that is citizens' actual income after inflation is factored in—it is declining. As you can see in this chart, from May to June, real average hourly earnings declined by one percent, which isn't great to see.

However, one factor that is notable is that income has only fallen to levels seen at about Q4 2019, which is our last truly pre-pandemic quarter. Do remember that this big spike in median real earnings of wage and salary workers is really due to the fact that during 2020, the vast majority of jobs that were lost were low-wage service sector jobs. Thus, the median spiked way up. Fast forward to 2022, and now that those jobs have been added back into the mix, we're essentially back to where we were before this all started.

So while it looks really bad on the surface, real income is really neither here nor there, so I wouldn't say this category screams recession. Then, moving on from there, the next figure that the NBER talks about is employment. This is probably the strongest argument for those who say the United States is not in recession.

In recessions, unemployment goes up, businesses suffer, and people lose their jobs. In 2008-2009, the unemployment rate got up to 10%. That one was nasty. In the snap recession of 2020, we all know what happened—unemployment got up to 14.7%. But now, well, the unemployment rate is very low—just 3.6% in June. Non-farm payroll employment—so literally jobs that are non-agricultural—rose by 372 thousand. I mean, if you got this data in a vacuum and someone told you this country was in recession, you definitely laugh.

And this is what Jerome Powell was saying a week or so ago after the Fed decided to raise interest rates by 0.75, saying, "Employment is actually really strong right now in the U.S. Do you believe the United States is currently in a recession?"

"I don't. I do not think the U.S. is currently in a recession, and the reason is there are just too many areas of the economy that are performing too well. Of course, I would point to the labor market in particular. As I mentioned, it's true that growth is slowing. But if you look at the labor market, you've got growth—I think payroll jobs averaging 450 thousand per month. That's a remarkably strong level for this state of affairs. The unemployment rate is near a 50-year low at 3.6 percent. All of the wage measures that we track are running very strong. So this is a very strong labor market. You know, 2.7 million people hired in the first half of the year."

"It doesn't make sense that the economy would be in recession with this kind of thing happening. So I don't think the U.S. economy is in recession right now."

So no doubt that is some decent evidence that the U.S. isn't in recession. The labor market is really strong. And we'll hold that thought for a second and move on to our last recession indicator from the NBER, which is various forms of real consumer spending. This one, on the surface, looks strong too. If we look at personal consumption expenditures, spending is at all-time highs. People got the cash, and now they're spending it. That's good for businesses and keeps the economy humming.

However, is this spending sustainable? Michael Burry tweeted out not too long ago that this increased spending, boosted by the inflation that we're currently copying, is crippling household bank accounts. The savings rate is plummeting as inflation continues and interest rates rise. For a lot of people, their bank balances are dropping fast.

And this is what I was getting to: yes, unemployment is low, yes, incomes are still at pre-pandemic levels, and yes, consumers are still spending. But will we see the same picture in three to six months from now? If manufacturing output does drop, you know, if businesses do struggle to move their non-essential products, if earnings fall and widespread layoffs occur, if households run out of savings at the same time that the federal reserve is hiking interest rates to control inflation?

To me, there's just something a little bit off with the White House and the Federal Reserve so confidently saying that the U.S. is not trending towards a recession when we've got so many issues that are all heading toward a worse economic scenario. So that's my take. But, you know, for right now at least, it does not yet look like a classic recession in the United States.

I really like this analogy I read in CNN lately. It said the economy right now is kind of like a patient with a mix of symptoms that don't necessarily align with one disease or another. Something's off, of course, but your doctor isn't going to give you a diagnosis if they don't actually know what's wrong with you.

I think that's about where we're at with the U.S. economy right now. There are definitely some symptoms, but I think we'll come back and double-check it in three to six months with a blood test.

But anyway, that's my take on the situation, and I'd love to hear from you. You know, am I wrong? Will inflation settle and allow the Fed to stop raising rates? You know, maybe. Are we about to get smacked with a giant recession? Maybe. Definitely let me know what you think down in the comments section below. And as always, guys, leave a like in the video if you did enjoy it. Subscribe if you'd like to see more. But that'll do me.

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