Is the US economy at risk of recession?

After all, the US economy grew an annualised 3.3% in Q2, and the Bloomberg survey of analysts put the chances of a recession in the next year at less than one in three. But the downward revision to employment data last week hints that economic conditions are worse than previously assumed, and that seems to have got many in the market thinking about recession risks.

The first point to note is that a recession in the US is not defined as two consecutive quarters of negative growth as it is in other countries. Instead, the private Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) gets to ‘date’ recessions and it does so based on a range of indicators, one of the most important of which is the labour market.

In theory, at least, this gives the NABE licence to declare a recession even if GDP has not fallen, or not fallen by two consecutive quarters. But is the labour market flashing signs of a recession, especially in light of the downward revisions to payrolls seen last week? The first point to make is that most estimates of recession probability that are based on the labour market relate to the unemployment rate, not payrolls. Hence, last week’s revision makes little difference.

The most famous labour market rule is the so-called Sahm rule which is meant to signal that a recession has begun when the three-month moving average of the unemployment rises by 0.5% points or more above the lowest point for the unemployment rate in the prior twelve months. This line was crossed in Q3 last year. Another, similar indicator, from Michaillat and Saez¹ includes vacancy data as well which is supposed to give a faster signal that the economy is in recession. It too crossed its threshold last summer. Unless these sorts of indicators are mistaken, the US economy could already be in a recession. Perhaps more likely is the sense that the US could be about to fall into a recession even if these labour market warning signs are not actually as bad as they were last summer. But it certainly does not look as if the NBER will declare a recession anytime soon.

In addition, there’s another issue that we have to bear in mind as well which is that political pressure on the NBER to not declare a recession, either now or in the future, will likely not just be intense but could come with a threat of retribution. All sorts of institutions in the US have to be more careful about what they say and clearly a recession designation suggests that the NBER will have to be more careful – or brave – than most.

The White House passed off the 911k downward revision to employment data this week as reflecting the failed policies of the previous administration and, for the moment that’s fair as the revision only goes up to March 2025. Future downward revisions to later data could, of course, cast aspersions on the White House’s assessment. But it would be far harder to lay any recession designation at the door of the Biden administration, although we dare say that the White House would try. This means that political pressure on the NBER will presumably be intense and, in the worst case, could mean that an actual recession goes undefined. Much here will presumably depend on whether any recession designation is a close-run thing, or blindingly obvious.

In the case of the latter, the NBER would be compelled to say that the US is in a recession. But if it is the former, which perhaps looks more likely at the moment, we could see any recession designation withheld because of political pressure. But recession or not, Steven Barrow, Head of Standard Bank G10 Strategy expects growth to remain very muted. “Our 1% growth calls for this year and next are more than half a percentage point below the Bloomberg consensus. Hence, even if the economy does not fall below the zero line the pressure will stay on the Fed to ease in coming months – and the pressure will stay on the US dollar as well”, said Steven Barrow.