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How the US economy is losing momentum

While not exactly in recession, Reuters market analyst John Kemp assesses how the US economy needs attention…

Like U.S. Supreme Court Justice Potter Stewart’s famously flexible definition of obscenity (“You can see it”) Recessions are notoriously difficult to define precisely.

Observers are often divided on whether the economy is already in recession. There is also disagreement over whether a recession has occurred since then, or whether the expansion of the business cycle is just a continuous “soft patch”.

Most countries informally define a recession as two consecutive quarters of negative real gross domestic product (GDP) growth, but using GDP data in this way requires significant corrections. It has a drawback because it can become

In the United States, the National Bureau of Economic Research (NBER) defines recession more flexibly as follows: “A significant decline in economic activity that spreads across the economy and lasts for more than a few months.”

This definition emphasizes three characteristics: depth, spread, and duration, to distinguish between economy-wide recessions and moderate slowdowns, or cyclical recessions confined to one or a few sectors. I’m here.

In fact, the NBER’s Business Cycle Dating Commission, recognized as a recession arbiter, employs a variety of indicators to determine when a recession has occurred.

“Because a recession has to affect the economy broadly and not just in one sector, The Commission emphasizes economy-wide measures of economic activity. ” NBER explains on their website.

These indicators include transfer payments after personal income deduction (PILT), nonfarm payroll employment, household employment, real personal consumption expenditure, industrial production, etc.

Even with this set of indicators, the NBER often determines that a recession has been experienced months after it began.

About threshold

Based on recent data, the US economy is currently pausing at a threshold between a major mid-cycle soft patch and a formal late-cycle recession.

The industrial side of the economy, including the manufacturing and freight forwarding sectors, is in a prolonged and deep recession that is likely already at recession thresholds.

Manufacturing has contracted since November 2022, according to the monthly business survey, confirming this decline due to lower container freight, diesel consumption and industrial electricity sales.

However, the much larger service sector still reported modest growth, according to the same survey, and so far the economy as a whole has not plunged into recession.

Chartbook: US Economic Indicators

The Institute for Supply Management’s (ISM) service sector index was 51.9 in April (more companies were reporting increased activity than contraction), while the manufacturing sector index was just 47.1.

The contrast between sectors is less than it seems. In general, the services index is higher than the manufacturing index throughout the cycle, but both move in roughly the same direction.

In April, the ISM Services Index was only in the 15th percentile for every month since 1997, while the Manufacturing Index was only in the 9th percentile.

If manufacturing is already in recession, services are just avoiding it right now.

income and employment

So far, rising consumer spending has helped offset a sharp slowdown in business spending and efforts to reduce excess inventories by suspending or reducing new orders.

As a result, households were able to sustain their spending. Increased income through increased employment, wage and salary cost-of-living adjustments, and reduced taxes.

In the first three months of 2023, real personal income, net of transfer costs, increased by 1.7% year-on-year, accelerating significantly from 0.3% in the second quarter of 2022.

An increase in real PILT, combined with a post-pandemic rotation of spending from goods to services, has boosted some of the services sectors despite inflation.

Lower gasoline prices have eased some pressure on households, slowing growth but increasing employment in both manufacturing and services, supporting incomes.

At the same time, interest rates are still rising and household and business credit conditions are tightening in the wake of the regional banking crisis.

recession as a story

Economist Robert Shiller more informally, but fundamentally, likens recessions to a “narrative” that spreads like an epidemic through the economy (Narrative Economics, Shiller, 2017).

“A recession is when many people cut back on spending, make ends meet with old furniture instead of buying new, postpone starting new businesses, or delay getting new help in existing businesses. It’s time to decide.”

Some of the recession-related stories have become more popular in the past nine months. It is likely to herald a further slowdown in the economic cycle.

Many prominent companies focus more on efficiency, cost control and margins than on growth. Investment is slowing and layoffs are becoming more common in at least some sectors of the economy.

One strong sector of the economy is increasing non-farm employment. But growth is slowing here, too, and there are signs the labor market is starting to cool.

The number of people filing for unemployment benefits for the first time each week has started to climb from a multi-decade low in the third quarter of 2022.

A more cautious approach to individual household and business spending is reasonable, but recessionary as a whole.

In recent decades, recessions and mid-cycle soft patches have typically pushed central banks to cut interest rates and spend more.

But with unemployment at multi-decade lows, rising labor costs and limited spare capacity in the economy, Central bank policymakers may prioritize controlling inflation over supporting growth.

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