MainStreet Macro: Are we or aren’t we? The three Ds of recessions, and how to prepare

Are we in a recession? Maybe, maybe not. What we know for sure is that the economy is running hot this summer – and not just because of the temperatures. Inflation and higher prices on just about everything, is melting consumer buying power.

Yet our first look at second-quarter GDP on Thursday showed that the economy declined by 0.9 percent, following a 1.6 percent decline in the first three months of the year.

The back-to-back contractions prompted some experts to ring recession alarms while others urged people to chill. After announcing another rate hike, Federal Reserve Chair Jerome Powell advised markets to take preliminary GDP data with “a grain of salt” given its propensity for revision.

The three Ds of recession economics

What’s behind this are-we-or-aren’t-we debate? The simple and popular definition of a recession is two consecutive quarters of economic contraction. But the eight economists at the National Bureau of Economic Research Business Cycle Dating Committee who make the official call don’t stop there. 

For them, recessions are measured by the three Ds – depth of the downturn, its diffusion or reach, and its duration. The last time they called a recession was in April 2020, when they officially declared the pandemic downturn. That recession lasted only two months, the shortest on record, but it was deep and broad-based and met the committee’s criteria in spades.

It could be a year or more before we get official word that today’s economy is – or isn’t – in a recession. Regardless, I and other economists see a slowdown in the works.

In this, our first summer after two years of peak pandemic, people are antsy with pent-up demand for clothes, travel and other things. But consumers aren’t spending more just to meet demand. They’re also paying more for what they’re buying.

There’s mounting evidence that consumer spending, which makes up 70 percent of the U.S. economy, is doing barely better than treading water. Consumer spending was up only a modest 0.1 percent in June from a year ago.

Come fall, the cumulative effects of higher interest rates and still-high prices will cool demand even more. Big-box retailers are warning that consumer spending is slowing, especially on larger items.

So, whether we’re actually in a recession or not, here’s how to position for the slowing economy

Recognize that old patterns might not apply.

On Main Street, recessions typically are marked by job losses. This time around, the slowdown is unlikely to show up in the labor market in the same way.

In sharp contrast to downbeat economic indicators such as new home sales and business investment, the job market continues to buzz with activity.

The economy added more than 2.7 million jobs in the first half of the year. Openings are plentiful. Unemployment is near record lows and wage growth is accelerating.

With those conflicting backdrops, the broader economic slowdown is unique, some would even say weird.

Heed changes in consumer spending

During the pandemic, people spent more than usual on goods and less on services. They bought houses, computers and other big-ticket items and spent less on travel, movies, restaurants and other activities.

That pandemic pivot hasn’t completely reversed, even as the economy has reopened. It could be that surging prices for services have discouraged consumers from resuming their old ways. Or we could see a more-permanent repositioning of the consumer budget. 

Industries aren’t likely to slow in lockstep. Some might see new demand crop up as supply shortages ease and prices level off.

When it comes to cost-cutting, grab a scalpel, not a hatchet

Businesses commonly reduce headcount during recessions. This time, however, labor supply has been persistently tight and a high number of workers are still on the sidelines. 

After spending a better part of a year trying to hire in a highly competitive job market, companies might want to be cautious about cutting payrolls.

Initial jobless claims, a common measure of layoffs, have ticked up from historically low levels, but remain in a healthy, pre-pandemic range.

My Take

Recession will continue to be a hot topic, but an economic slowdown doesn’t always mean a recession. And not all recessions are equal. Some, like the one we experienced in February and March 2020, can be quite short. 

For all its complexity, the economy’s natural inclination is to grow. While slowdowns and recessions occasionally can knock growth off track, theory posits that economies grow due to investment in people and technology. That was true for centuries before the pandemic and is true now.