So, are we in a recession or not?
Recessions are complicated to identify, given that the economy is big and has many parts. Currently, some parts of the U.S. economy, like the labor market, are growing quickly, while others, such as housing, are slowing.
While two quarters of economic contraction typically do coincide with a recession, they also do not typically involve the hot job growth the U.S. economy has seen this year. And recessions rarely happen when unemployment – which is currently at a roughly half-century-low of 3.6% – is falling. The economy is typically not in recession if almost everyone who wants a job has one.
In addition, recessions usually involve declines in real gross domestic income, which is similar to GDP but instead specifically measures income and costs related to production. In theory, they should move more or less in tandem, but gross domestic income continues to grow.
Another measure of growth is personal income, which has been climbing for most of the year and rose faster than spending in May. The Fed watches this metric closely because of its predictive ability, as does the National Bureau of Economic Research, in addition to unemployment.
If you want a strong signal to tell if that might be happening, look at residential investment as a percentage of GDP. Residential investment is how much individuals spend on new homes and home improvement. Right now it’s flat, but when it starts to decline, a recession is usually on its heels.
Keep in mind, 2021 boasted one of its best U.S. economies in decades, so maybe Americans can accept a so-so 2022. In some ways, an economy that is not growing too fast might also mean an economy that is getting inflation under control, which suggests that sometimes not so great news is actually good news.