A Recession is Coming!

Think of Paul Revere, riding through the night, warning of the British. Only now it's economists shouting out a warning about the American economy

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Let’s take a trip back in time, to the night that etched Paul Revere's name into the annals of American history. We’re in Massachusetts, 1775. Revere mounts his horse and rides across the state to warn of incoming British soldiers. He was warned to keep quiet, but insisted the town be awake because “The regulars are coming out!”

Now flash forward to 2023, where economists and political analysts are sweeping through the nation warning of impending trouble. Instead of a lantern swinging in the night air, they bring with them economic graphs and data. Instead of clattering hooves alerting townsfolk to the approaching British soldiers, they instead yell, "A recession is coming!"

For the better part of two years, that's precisely the cry we’ve heard from Wall Street to Main Street. Economists and political analysts have been our modern-day Paul Reveres, warning that a recession was on the horizon for 2023. But it didn’t come. At least, not in the way many predicted. As the so-called "vibecession" winds down, many are left wondering what’s coming next. I’m here to tell you that a recession is coming, but the "when" remains a mystery.

A Vibecession Doesn’t Count

Let’s unpack the term "vibecession." It was intended to capture a national sentiment of economic downturn despite positive economic indicators. Throughout 2023, the Bureau of Labor Statistics kept reporting a low unemployment rate of around 3.6%. Consumer spending, the engine of the U.S. economy, chugged along steadily. Yet, the mood? Not so positive.

Consumer sentiment reports painted a less rosy picture. Despite not facing immediate financial distress, many people expressed unease about the country’s economic outlook. This gap between data and public sentiment is a fascinating economic phenomenon, but sometimes, perception can influence reality. If enough people believe a recession is coming and tighten their belts, their collective caution could slow economic growth. Yes, vibes matter, but they don't directly dictate economic cycles.

Growth Despite Gloom

Despite the collective worry, the economy showed resilience. People may have talked about reducing their spending, but the country’s production increased every quarter last year. Let’s talk about GDP, or Gross Domestic Product, the broadest measure of economic activity. There were two negative quarters in 2022, but it was up since then, averaging about 3% growth each quarter.

It’s important to remember that GDP is all about quantity, not quality. It tells us how much we’re producing, but not whether it’s making our lives any better. Building more cars? GDP goes up. More emergency services because of those cars? GDP still goes up. It’s another example of the vibes not matching the data.

Despite the back-to-back quarters of shrinkage in 2022, the National Bureau of Economic Research (NBER) didn’t call that a recession. Why? Because they're looking at the wider picture of our economic activity and not just GDP. Our economy is complex, and shouldn’t just focus on how much we're producing. It should consider how we're living as well.

So what tools do we have to gauge our well-being? We can look at the Human Development Index (HDI) for a broader picture, factoring in life expectancy, education, and income. There’s also the Genuine Progress Indicator (GPI), which tries to account for the environmental and social costs of growth. These measures provide more context to our lives but often get buried under news about the latest GDP numbers.

A Recession is Coming

As talk of the "vibecession" begins to fade, it’s time to acknowledge the cyclical nature of our economy and the inevitable recessions. Just like Paul Revere's midnight cry, I’m here to tell you, "The recession is coming!"

Our economy operates in cycles, known as business cycles, with four distinct phases: expansion, peak, contraction, and trough. Recessions are part of the cyclical nature of the economy, but the length and intensity of each phase varies:

1. Expansion: this phase is marked by increasing economic activity. Key indicators such as GDP, employment, income levels, and retail sales typically increase during this period. Expansion leads to increased consumer spending, business investment, and an overall sense of economic well-being.

2. Peak: it’s the point where the expansion tops out and the economy is operating at maximum capacity. Output, employment, and other indicators are at their highest, but growth rates start to stabilize and may even begin to decline.

3. Contraction: this period is characterized by declining GDP, reduced consumer spending, lower levels of production, and an increase in unemployment. A recession is a part of this contraction phase, defined as a significant decline in economic activity across the economy, lasting more than a few months.

4. Trough: The trough is the lowest point of the business cycle, where economic activity is at its weakest. It marks the end of the contraction phase and the beginning of the next expansion.

Predicting when a recession will hit is tricky. Even the best economists get it wrong. We don’t always agree in hindsight. Many thought we were headed for a recession after two consecutive quarters of negative growth, but the official call never came and still hasn’t been called. There's no official "recession" label until the NBER says so, after thoroughly examining the data

Looking Ahead

So, what's the takeaway? Be prepared. Just like Paul Revere's ride wasn't about spreading panic but about readiness, the same goes for recessions. The next time you hear "a recession is coming!", remember, it's not about fear. Recessions are a natural part of our business cycle, not a signal to hit the panic button. Understanding the cyclical nature of the economy allows us to plan better, stay resilient, and find opportunities amidst the challenges.

• Only 47% of Americans say they are “very satisfied” with their personal lives, one point shy of a record low [Gallup]

• The share of Americans saying economic conditions will be worse a year from now has fallen from 46% in April 2023 to 33% at the start of 2024 [Pew Research Center]

• Since World War II, the average recession lasted about 10 months in the United States [Forbes]

• Total civilian employment fell by 8.8 million as the COVID-19 pandemic brought the economic expansion to a sudden halt [Bureau of Labor Statistics]

• The United States ranks 21st in the Human Development Index [United Nations]