EXPLAINER: How do we know when a recession has begun?

The U.S. economy has contracted for two straight quarters, intensifying fears that the nation is on the cusp of a recession — if not already in one — barely two years after the pandemic recession officially ended.

Six months of contraction is a long-held informal definition of a recession. Yet nothing is simple in the post-pandemic economy. Its direction has confounded Federal Reserve policymakers and many private economists since growth screeched to a halt in March 2020 as COVID-19 struck and 20 million Americans were suddenly thrown out of work.

One sector of the economy that has remained defiantly buoyant is the jobs market and on Friday, the Labor Department will release monthly employment data that most economists believe will show that hiring, too, has begun to cool.

That would be a sizeable shift in an era that may be remembered for having so many unfilled jobs that there were two available for every American who didn’t have one.

Even as the economy shrank over the first half of this year, employers added 2.7 million jobs — more than in most entire years before the pandemic struck. And the unemployment rate has sunk to 3.6%, near a half-century low. Robust hiring and exceedingly low unemployment aren’t consistent with a recession.

While most economists — and Fed Chair Jerome Powell — have said they don’t think the economy is in recession, many increasingly expect an economic downturn to begin later this year or next.

Either way, with inflation raging at its highest level in four decades, Americans’ purchasing power is eroding. The pain is being felt disproportionately by lower-income and Black and Hispanic households, many of whom are struggling to pay for higher-cost essentials like food, gas and rent. Compounding those pressures, the Fed is jacking up interest rates at the fastest pace since the early 1980s, thereby magnifying borrowing costs for homes and cars and credit card purchases.

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As a result, regardless of whether a recession has officially begun, Americans have increasingly soured on the economy,

So how, exactly, do we know when an economy is in recession? Here are some answers to such questions:

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WHO DECIDES WHEN A RECESSION HAS STARTED?

Recessions are officially declared by the obscure-sounding National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

The committee considers trends in hiring as a key measure in determining recessions. It also assesses many other data points, including gauges of income, employment, inflation-adjusted spending, retail sales and factory output. It puts heavy weight on jobs and a gauge of inflation-adjusted income that excludes government support payments such as Social Security.

Yet the NBER typically doesn’t declare a recession until well after one has begun, sometimes for up to a year. Economists consider a half-point rise in the unemployment rate, averaged over several months, as the most historically …read more

Source:: Headlines News4jax

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