Friday, September 6, 2019
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It's not just two quarters of contracting GDP
The biggest question hanging over markets right now is whether Donald Trump's trade war will tip the U.S. economy into recession.
If it does, the National Bureau of Economic Research won't tell us about it for a while. But we also won’t be debating the existence of a recession, either — the NBER says we should already be neck-deep in it.
The NBER’s technical definition of recession is not just two straight quarters of negative GDP growth. A recession actually starts whenever the NBER says it starts, with this point broadly defined as "a period between a peak and a trough" in economic growth.
"During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year," according to the NBER.
The Bureau adds that its business cycle dating committee — which actually makes the call on recessions and expansions — "does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income."
But the NBER also notes that it "waits long enough so that the existence of a peak or trough is not in doubt." The lag between recessions’ beginning and the NBER declaring the economy in recession ranges from 6 to 21 months. But when you know, you know.
During the financial crisis, for instance, the NBER didn't declare the economy in recession until November 2008, 11 months after the recession actually began. By November 2008, the big banks had been bailed out, Lehman Brothers had failed, and almost 3 million Americans had lost their jobs. No one needed the NBER to tell them in the fall of 2008 things were not going well in the U.S. economy.
So, if tariffs are going to set off the next U.S. recession, we should start finding out soon. And we should see the effects clearly.
Friday's jobs report, however, is expected to show the labor market remains in fairly good shape. Wall Street economists forecast nonfarm payrolls grew by 160,000 last month, according to data from Bloomberg.
A report in-line with estimates will likely keep recession fears at bay. But the August jobs report is just the first of what will be several months of employment reports that could show the first cracks in the current expansion.
At the beginning of August, Trump announced a new round on tariffs on Chinese imports. At the beginning of September, these tariffs took effect. Some economists estimate these tariffs will cost households around $1,000 per year. And the negative impacts on business sentiment from these policies is starting to show up in economic data.
Survey data released this week points to a slowdown in the U.S. labor market. Chris Williamson, chief business economist at IHS Markit, said Thursday that, "Overall jobs growth in August was the weakest since early-2012, commensurate with nonfarm payrolls rising at a monthly rate of under 100,000." Reports from the manufacturing sector in August also indicate U.S. manufacturing is in its worst state in at least three years. New exports fell at the fastest pace in a decade due to trade concerns.
And while the semantics around what defines a recession might seem beside the point, I think this actually highlights what we really mean when we say recession. It's not just two quarters of contracting GDP. It's not just an inverted yield curve. It's the end of a cycle, a definitive break in the economy's prevailing trend that takes time to correct and leaves no room for doubt about where things stand.
Right now, a potential recession is a question for investors. A debate to be had on trading floors, on Twitter, on Yahoo Finance. But when a recession does come to the U.S., there will be no question about its existence. And if a recession is started by the Trump's trade war, its arrival probably isn't far off.
What to watch today
August U.S. employment report 8:30 a.m. ET
Nonfarm payrolls added: 160,000 expected, 164,000 added in July
Unemployment rate: 3.7% expected, 3.7% in July
Average hourly earnings MoM: 0.3% expected, 0.3% in July
Average hourly earnings YoY: 3.0% expected, 3.2% in July
From Yahoo Finance
Since it is jobs day, Tune into The First Trade 30 minutes early at 8:30 a.m. ET, which will deliver you the results. BNP Paribas U.S. CEO Jean-Yves Fillion will be on to help dissect the numbers.
States to launch Google, Facebook antitrust probes [The Wall Street Journal]
U.S. Treasury wants to change the way your mortgage is financed [Yahoo Finance]