With 22 million jobs lost in the past four weeks, a record drop in retail sales, and huge drops in industrial production and housing starts, it is safe to say we are likely in a recession. Even the Federal Reserve (Fed) in the recent Beige Book said that “economic activity contracted sharply and abruptly.” We highly doubt the Fed would say that if they didn’t believe the economy was in a recession.
Here’s the catch; the National Bureau of Economic Research (NBER) makes the official call on the recession start date, and it might be a while before it is official.
Contrary to popular belief, a recession doesn’t require two consecutive quarters of a decline in real gross domestic product (GDP). The NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
According to NBER’s website:
The committee’s procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP and real GDI, but use a range of other indicators as well. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in activity.” Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates. The differences between these two sets of estimates were particularly evident in the recessions of 2001 and 2007-2009.
“If you are looking for a quick call from NBER on when this recession started, don’t hold your breath,” explained LPL Financial Senior Market Strategist Ryan Detrick. “They have taken years to make calls official, as they would rather be accurate than first in economic calls. At the end of the day, we expect this recession will likely be well over before it is officially recognized.”
As shown in the LPL Chart of the Day, official calls for expansions and recessions by NBER have taken years in some cases. In fact, after the economic turning point, it has been nearly a year on average before the call was made official. All of this suggests the NBER should be viewed as a historical keeper of economic data and not looked to for real-time analysis.
For more of our thoughts on the economy and markets, check out our latest LPL Market Signals podcast.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value
For Public Use – Tracking 1-05001353