With so much economic uncertainty and debate around whether the U.S. is heading towards a recession, we’d like to revisit some indicators that we had mentioned in previous newsletters.
Unlike politicians who are politically motivated to point to certain economic data points to justify whether we are heading towards a recession or not, we simply want to look at the data. We care about what economists are saying, and economists are saying to keep an eye on the National Bureau of Economic Research, or NBER.
The NBER is a private, non-partisan organization whose purpose is to track the business cycle of the U.S. economy. As a refresher, the business cycle refers to the natural ebbs and flows of an economy, more commonly referred to as expansion and contraction (recession).
Now, how does the NBER track the business cycle? There are six economic indicators that the NBER has historically tracked on a monthly basis to determine when the business cycle switches from expansion to contraction (recession), and vice versa. The six indicators include Real Personal Income (Less Transfers), Non-farm Payrolls, Employment Level, Real Personal Consumption Expenditures, Real Manufacturing and Trade Sales, and Industrial Production.
The names of these indicators can sound like financial jargon, so let’s give a layman’s description of each one. Real Personal Income (Less Transfers) refers to the inflation-adjusted income earned by individuals and households, excluding things like Social Security and unemployment benefits.
Non-farm Payrolls is an employer survey that tracks the number of people employed in the private sector, excluding people working in agriculture, households, and non-profits.
Employment Level is a household survey that tracks the total number of people employed. Real Personal Consumption Expenditures tracks the inflation-adjusted spending by individuals and households on goods and services. Real Manufacturing and Trade Sales refers to the inflation-adjusted sales by manufacturers and wholesalers. Finally, Industrial Production measures the inflation-adjusted output of the manufacturing, mining, and utility industries.
With these definitions in mind, let’s discuss how they are able to track the business cycle. Based on the historical data of these six economic indicators, every economic recession post-WWII has seen all of the NBER indicators be simultaneously negative quarter-over-quarter during the recession. While the NBER doesn’t declare the beginning and end of recessions in real-time, having all six of these indicators show a negative growth rate quarter-over-quarter in the same month would serve as a reliable indicator that we are currently in a recession.
So, where does the NBER stand today? Well, prior to this morning, only Industrial Production had a negative growth rate quarter-over-quarter. However, this morning’s data release now shows Industrial Production having a positive growth rate, meaning that all six NBER indicators are positive on a month-over-month, quarter-over-quarter, and year-over-year basis.
In short, while there are areas of the economy showing cracks and slowdown, all six indicators that the NBER follows to confirm recession continue to show strength in spite of these headwinds. This isn’t to say that an economic slowdown or recession couldn’t occur in the near future.However, it is notable that reliable economic indicators such as these have yet to showlevels that would indicate a recessionary environment. With that said, we will continue to be vigilant in remaining up to date on any upcoming economic data releases.
