Are We There Yet?

Posted on February 16, 2023 Published by

As kids, my siblings and I always looked forward to visiting our grandparents in the Upper Peninsula of Michigan.  It was a very long trip to the U.P. from our home in Lansing prior to the construction of the interstate and completion of the Mackinaw Bridge.  Add to that one large Irish Setter, AM-only radio, and “260 air conditioning” (two windows down and 60 miles per hour), and you have all the makings for feuding and impatience.  Needless to say, the least favorite question from the back seat was “Are we there yet?”

Are We There Yet?

This seems to be the question on the minds of most economists and business owners as it relates to the economy and, specifically, recession.  To begin to answer the question, we need to define recession.

The simplest definition was popularized by Julius Shiskin in 1974 as two consecutive quarters of negative GDP.  Like most simplified definitions, it has shortfalls.  First, it only captures a small corner of a recession’s true scope. Second, it is only defined after you have been in it for some time.

A more robust (and more complicated) definition has been developed by the non-profit research group National Bureau of Economic Research (NBER). They are generally considered the arbiter of recession. The NBER defines recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.” Whew!  According to the NBER, there have been 33 recessions in the U.S. since 1857, and 13 since World War II.  The average length of a recession post WWII has been 11 months.  Remember, the end of the recession does not mean that the economy is back to pre-recession levels.

Causes of Recession

While not all recessions are the result of the same causes, there are many similar issues.  The primary causes identified by the NBER include:

  • Economic shock such, as natural disaster, terrorist attack or pandemic.
  • Loss of consumer confidence. Approximately 70% of the GDP depends on consumer spending.  Accordingly, decreases in real income, high inflation, high unemployment (or low labor participation) affect consumer confidence.
  • High interest rates. Higher interest rates make it more expensive to borrow. Both consumers and businesses are less likely to spend on major purchases (homes, autos, etc.).
  • In deflation, product and asset prices fall because of a large drop in demand.  As demand declines, sellers reduce prices and consumers wait for prices to fall more, resulting in a downward spiral.
  • Asset bubbles. This appeared in the dot-com era. More recently, in real estate, as prices rose rapidly beyond what could be supported by fundamentals.  In “bubbles,” prices are supported by inflated demand which eventually dissipates and the “bubble” bursts.

Current Recession Indicators

While not all the above characteristics are currently present, there are many recession indicators that are. Inflation and higher interest rates are sapping consumer spending.  Consumer confidence has declined from the prior year. Housing starts are down 10% from the previous year. Home sales as reported by the National Association of Realtors were down 5.9% in October compared to September and off 28.4% from October 2021.

Although GDP was a positive 2.1% for 2022, this is a fairly weak performance given the rebound from the pandemic and the fact that two quarters (Q1 and Q2) posted negative GDP.  Unemployment has improved slightly for 2022 from 4.0% in January to 3.5% in December. But the labor participation rate has not returned to pre-pandemic levels. Even this number can be misleading if the “participants” are people who seek second jobs; we need to look to how many people are unemployed and the number of people who have dropped out of the workforce.

What Can We Do?

On January 23, 2023 a press release from the Conference Board of Leading Economic Indicators (LEI) indicated a decrease of 1% in December. This followed a 1.1% decline in November.  Overall, the LEI is down 4.2% over the six-month period of June to December, much greater than the decline of 1.9% for the previous six months.  A decline of over 4% has historically been a recession signal for the U.S. economy.

So, the question of the impatient child remains: “Are we there yet?”  I suppose a better question might be “What should we be doing when we get there?” Or, are we perhaps already there?  In our next month’s installment, we will take a high-level look at some do’s and don’ts for lending and credit professionals as they navigate through the economic minefield.  In the meantime, lots of economists, authorities, and pundits will be deliberating the question of whether we are now in a recession.  However, for the more simple-minded like myself, “If it walks like a duck and talks (quacks) like a duck, it is most likely a duck.”


Richard Rudolph is Senior Consultant at Enlighten Financial, a specialized consulting firm that focuses on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape. We lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to Rick directly, please call: 920.445.8133.

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