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The U.S. economy is all over the place right now. Rapidly evolving trade policy has everyone — consumers, corporate America and the rest of the world — navigating a period of major uncertainty. And underlying all of it are two big questions: Is a recession coming, and how does all the talk about a recession influence whether we have one? Let’s start with what a recession means. Economists say the odds of a recession are higher as the president imposes tariffs on most of America’s trading partners. But the definition of a recession is different depending on who you ask. If you took Economics 101, your professor likely told you the most popular rule of thumb: A recession is two consecutive calendar quarters of declining growth in the nation’s gross domestic product (the value of all goods and services produced). There’s also the relatively new Sahm Rule, which relies on changes in unemployment rates to detect a recession, and the inverted yield curve indicator, which looks at how investors feel about U.S. Treasury securities. (Here’s the nitty gritty on when each of these indicates a recession if you want to dive deeper.) But the National Bureau of Economic Research, a nonpartisan, nonprofit research group in Cambridge, Mass., is the official arbiter of whether the U.S. economy is in a recession, and that group defines it as a “significant decline in economic activity that is spread across the economy and lasts more than a few months.” NBER economists say they have no fixed rule about the metrics they use to assess recession periods, though they consider more than GDP. They’re also willing to stray from their standard definition — as they did during the early days of the pandemic — when the downturn in March and April of 2020 was deep enough to qualify despite lasting only two months.So where are we now?
U.S. GDP shrank for the first time in three years in the first quarter, but mainly because companies that were stocking up on goods ahead of pending tariffs triggered a sharp increase in imports (which are subtracted when calculating GDP.) Some economists said the first-quarter decline belied a more positive underlying strength, and GDPNow, which follows various economic indicators in real-time, shows GDP is on track to grow again in the second quarter. Of course, fast-moving trade policy makes it especially hard to predict what’s ahead, and that gets at the bigger takeaway here. The government’s temporary truce with China this week had multiple economists revisiting their forecasts. One at Apollo Global Management who had recently predicted a near certain 2025 recession if trade policy didn’t change said the China news lowered the odds to 30%. Another at J.P. Morgan reportedly said the chances had fallen to below 50% from 60%. And it’s worth noting that the probability of a recession in any given year is about 15%, according to Oxford Economics. So what? A recession is one thing, but what may matter more is how we all feel about the future. Already, the economy is churning out a mixed bag of numbers. Consumer spending and employment levels are holding relatively strong, but surveys show Americans are much more pessimistic about their current and future financial situation. One benchmark of consumer expectations has fallen to a 13-year low. Meanwhile, the S&P 500 Index briefly dipped into bear market territory in April, and companies are lowering earnings expectations and cutting back on orders. Last month the CEO of Southwest Airlines told Bloomberg domestic leisure travel has dropped more than he’s ever seen outside of the pandemic. “I don’t care if you call it a recession or not, in this industry that’s a recession,” he said.Related Reading
• 5 Things to Do If You’re Worried About a Recession (SoFi)
• U.S. Recessions Throughout History: Causes and Effects (Investopedia)
• Tariffs Will Be Bad, but They Won’t Cause a Recession (Manhattan Institute)
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