Are We In a Recession? Look to Trustworthy Data for the Answer

by | Jul 17, 2023 | *Financial Awakenings, Building Wealth, In The News, Investment, Money Psychology, The Economy, Weekly Column

When it comes to the economy, the idea of “fake news” is nothing new. We’ve often had a segment of the population believing the US government is intentionally lying. In the early 2000’s, economist Paul Krugman used the term “inflation truthers” to describe those who believed that the official government measures of inflation were intentionally inaccurate and the real rate of inflation was much higher than reported.

I was one of those “inflation truthers.” However, over time I came to believe that, despite some debate about the accuracy of the Consumer Price Index, there is no evidence to support the claim that the government is intentionally understating inflation. The Bureau of Labor Statistics bases its measures of inflation on a complex methodology that is widely accepted by economists.

According to Krugman, many of the “inflation truthers” are now joined by “recession truthers.” They believe that the economy is, and has been, in recession and that the official government data showing otherwise is a lie and a coverup. In August 2022, a survey by Cinch found that 76% of Americans believed the economy was in recession, even though 63% of them could not correctly define the term.

Those who believe the government and most economists are in cahoots to perpetuate a coverup choose to reject a lot of evidence to the contrary. In August 2022, the FRED blog (St. Louis Federal Reserve Bank) noted the economy was not in recession. The National Bureau of Economic Research (NBER), the official arbiter of recessions in the United States, does not predict recessions, but rather confirms them. Their data finds the US has not been in a recession since the pandemic recession of 2020.

The four predictors of a recession are: Gross Domestic Product, the employment rate, consumer spending, and industrial production. The Federal Reserve Board of Atlanta considers all these indicators in their daily GDPNow. While it is not a perfect predictor of recession, the model has been shown to be accurate in predicting real GDP growth. It is not currently predicting a recession.

Private companies that predictively track various aspects of a recession also suggest we are not currently in one. For example, a National Federation of Independent Business survey shows that many small businesses intend to expand their workforces, which is not something businesses do in a recession. Another previously mentioned source, FRED, using data collected by states, not the federal government, also shows the labor market is solid.

Declining stock markets can be an early indicator of a recession. The stock market is not currently in decline. When might that happen? One simple predictor of a stock market decline is the presidential election cycle. This is based on the theory that stock market performance is weakest in the first two years of a presidential term since wars, recessions, and bear markets tend to occur during that period, while bull markets tend to occur in the last two years of the cycle. Data from Yardini.com shows the stock market has a strong tendency to perform well following midterm elections, irrespective of the actual election outcome. During the 12-month period following each of the 20 midterm elections since 1942, the S&P 500 was up on average by 14.9%. None of the 20 12-month periods showed negative returns.

So far, in the eight months following the 2022 midterm elections, the Dow Jones index is up around 6%.

According to reasonable and trustworthy data, we are not currently in a recession. The chance that one will occur sometime in the future is 100 percent. When might it occur? That is a prediction that neither government economists nor “recession truthers” can accurately make.


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