Recession Watch

The economy is in an inflationary boom. Jobs, income, and production are all increasing quickly. However the ongoing bout of inflation — the fastest in 40 years — has pessimism about the expansion growing. The Federal Reserve is communicating they will raise rates higher and faster than previously expected to cool demand and slow inflation. Given inflationary booms traditionally don’t end well, economists are on recession watch. Historically Oregon’s recessions and expansions are perfectly aligned with the nation’s in terms of timing. That said, Oregon is usually more volatile than the nation with more severe recessions and stronger recoveries. Below our office will regularly update some important measures of economic activity. These updates are likely to be monthly and near the end of the month.

Most Recent Update: June 17, 2022

NBER Recession Dating

The National Bureau of Economic Research is the official arbiter of US recessions. The NBER defines a recession as a significant decline in economic activity that lasts more than a few months. Key data the NBER uses to date recessions and expansions includes: employment, industrial production, real personal income excluding transfer payments, real personal consumer expenditures, and real wholesale-retail sales. The latest data are shown in our office’s NBER 4 pack of charts.

Recession Probability

As of April 2022 the probability the U.S. had entered into a recession was 0.1% according to the latest update from Jeremy Piger, an economics professor at the University of Oregon. Professor Piger’s model uses the NBER variables above in a dynamic-factor Markov-switching model to estimate the probability the economy has switched from an expansion to a recession or vice versus. Three consecutive months above an 80% probability have historically been an accurate signal of the onset of recession.

Oregon Index of Leading Indicators

There are two main composite leading indicator series for Oregon. The UO Index of Economic Indicators is developed Tim Duy at the University of Oregon, and the Oregon Index of Leading Indicators (OILI) is developed by our office. Right now neither index is flashing worrisome signs. Both indexes did lead the 2001 and 2007 recessions by 6-12 months. Neither truly lead the sudden-stop nature of the pandemic recession.

In terms of individual components there are always ups and downs. One of the benefits of composite indices is that each individual indicator may not perfectly lead each cycle but when all the tea leaves are combined, the overall index should. Right now most indicators are pointing toward an ongoing expansion. The only indicator that has truly tanked is consumer sentiment (but consumers are still spending even if they are pessimistic.) New Incorporations are slowing off of multi-decade highs and housing permits are holding steady throughout the pandemic.

Initial Claims for Unemployment Insurance

In terms of individual indicators, two stand out in terms of accurately predicting recession. The first are initial claims for unemployment insurance. These are a measure of both layoffs in the economy and also how quickly workers expect they will be able to find another job. Right now initial claims are at or near record lows.

Yield Curve

The second individual indicator is the yield curve. The yield curve inverts when financial markets price short-term interest rates higher than long-term interest rates. This indicates financial markets expect the Federal Reserve to cut interest rates in a recession in the future and therefore longer-term rates are lower than short-term rates which are still high given current economic activity and inflation. One key measure to watch is the difference between the 2 year and 10 year Treasury rates. Today the yield curve is pretty flat but not inverted.

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