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August 4, 2022

More evidence the US is not (yet) in recession

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Julius Probst
Arnaud Lieugaut
Patrick Malm
Karl-Philip Nilsson
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US seasonally adjusted vs non-seasonally adjusted GDP

Is the US in recession or not? This week we dig deeper into the debate by looking at a few charts on the state of the economy. 

A common definition of a technical recession is two consecutive quarters of negative growth. This chart debunks that interpretation. First, GDP series are often subject to major revisions. For example, since GDI growth has been positive in Q1, there is a good chance the GDP series will be revised upwards later this year. 

Second, the non-seasonally adjusted GDP figure shows relatively strong growth in Q2. It is thus far from certain whether the US economy has actually experienced two consecutive quarters of decline.

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US NBER recession dating indicators

The US National Bureau of Economic Research relies on a wider set of indicators to determine whether the economy has entered a recession.

The NBER recession dating committee uses six main macroeconomic indicators:

  • real personal income less transfers
  • non-farm payrolls
  • real personal consumption expenditures
  • real manufacturing and trade sales
  • household employment
  • index of industrial production

As this chart shows, only real manufacturing and trade sales remain below their values in January. Other indicators, particularly employment, have recovered sharply since then. It is therefore extremely unlikely that the US economy entered a recession in the first half of the year.

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Conference Board recession indicators

Here’s a third indicator showing the US is not yet in recession. 

The Conference Board Coincident Economic Index is based on four out of the six time series that the NBER uses to construct a recession signal. 

In the chart below, we have plotted the seven-year rolling drawdown (based on the typical length of an economic expansion in the US) for the four indicators. Drawdowns during a downturn typically exceed 5% or more. As you can see, all but one time series (manufacturing & retail trade) is still at around zero percent.

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US labour market

Despite soaring inflation that has led the Fed to swiftly tighten monetary policy, the US economy has so far been protected by a strong labour market. But that too is now starting to change. 

This chart shows the number of job openings declined significantly last month – although it did start off at a very high base following the Great Resignation triggered by the pandemic. 

The Fed has been trying to cool inflation by reducing the number of job openings without killing jobs. While this has historically been impossible, things might be different this time. 

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VIX vs yield spread business cycle

The following chart maps the business cycle of the VIX volatility index against the yield curve slope to show different macro regimes. Note how financial markets have cycled through all four financial market scenarios at least once since the 2008/2009 recession, indicating that we have completed at least one full business cycle during that time. The US economy remains in the higher-volatility / flatter-curve regime for now even after the spread widened at the beginning of the year.

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Global house price indicators

With inflation rising across global economies, let’s now look at the impact this is having on house prices. 

This table displays five key housing indicators for 22 advanced economies. The data is ranked according to the OECD’s index of house price-to-income ratio, which is commonly used together with the house price-to-rent ratio as a key metric to determine affordability.  

You can see that housing in Canada, New Zealand, Portugal and the Netherlands are among the most overvalued, with relatively large housing price gains, both nominal and real. 

Moreover, countries with higher price appreciations are also recording larger credit growth – unsurprising given the feedback loop between the two. As macroeconomists Jorda, Schularick, and Taylor have shown in multiple studies, financial crises and asset price bubble bursts are almost always preceded by very high credit growth.   

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US house prices vs long-run trend

The US housing market is also creeping towards overvaluation. 

The following chart displays real residential prices alongside a long-run trend based on the Hodrick–Prescott (HP) filter and a standard deviation band to show large under/overvaluations based on the divergence from trend. 

As you can see, house prices were clearly above trend until the 2008 financial crisis and US recession sent them crashing and remaining below trend for several years. That changed when the Covid-19 pandemic and the resulting shift to remote working turned housing into a more valuable commodity – sending prices above trend for the first time in more than a decade. 

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US and Sweden: House prices vs disposable income

Despite strong price growth, the US is one of the few advanced economies where house prices have not significantly outperformed disposable income over the long run, with both series rising in tandem.

Prices in Sweden, on the other hand, have surged well beyond disposable income over the last decade.

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Hong Kong Phillips curve

The Phillips curve depicts the relationship between the inflation rate and unemployment rate. Generally, the pattern differs by country and macroeconomic regime, with downward sloping of what is essentially a ‘supply’ curve appearing only in economies affected by unexpected demand shocks, as economist Matthew Rognlie explained in this paper.

Hong Kong is providing a natural test for this hypothesis. Since its currency is pegged to the US dollar, the city’s monetary authority must follow the Fed’s interest rate policy, regardless of domestic economic circumstances. This has repeatedly exposed the Hong Kong economy to unexpected demand shocks, which is why the Phillips curve works better as an indicator for Hong Kong than for most other countries

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Semi-conductor inventories

The global semi-conductor shortage that has halted production lines and intensified focus on disrupted supply chains over the last couple of years appears to be ending. 

Our last chart shows inventories surging in major chip exporters South Korea and Taiwan as a global economic slowdown reduces demand

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