Are We in a Recession? It's Complicated. - The Journal. - WSJ Podcasts - The Wall Street Journal

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Kate Linebaugh: Right now there's one economic term that everyone's talking about.

Speaker 2: Recession.

Speaker 3: Recession.

Speaker 4: Recession.

Speaker 5: The US could be in recession.

Speaker 6: As they warn of global recession.

Speaker 7: Nearly 12 major economies are staring at a recession.

Speaker 8: Please get your finances in order because a recession is coming.

Speaker 9: Buckle up, folks.

Speaker 10: That means a recession is well underway.

Kate Linebaugh: Recession. Yesterday government data showed that the economy shrank for a second quarter in a row, a common definition of a recession. But it's not that simple. The economy is in a weird spot. Prices are rising, economic output is shrinking, but unemployment is low.

Jon Hilsenrath: If this all sounds confusing to anybody out there listening, you're not alone. Wall Street is confused about it. The White House is confused and very concerned about it. The Fed is confused about it. We are in a turbulent time and the data are confusing.

Kate Linebaugh: Welcome to The Journal, our show about money, business, and power. I'm Kate Linebaugh. It's Friday, July 29th. Coming up on the show. What's going on in the US economy right now? We'll get going, and we'll start as we always do. Would you kindly introduce yourself and tell us what you do at The Wall Street Journal?

Jon Hilsenrath: I'm Jon Hilsenrath and I'm a senior writer at The Wall Street Journal. That writing is almost always about economics or finance or economic policy.

Kate Linebaugh: Okay. So then can you tell us what the heck is going on?

Jon Hilsenrath: That's a really good question. I think it's confusing a lot of people. My analogy for what's happening right now, I think visual analogies sometimes help, imagine yourself standing over a fish tank of some sizable portion and you drop a rock in the thing.

Kate Linebaugh: The rock is the pandemic

Jon Hilsenrath: That rock's going to cause quite a splash. In fact, by the time the rock gets to the bottom of the tank, the water is still probably going to be splashing around. And that's kind of what's going on in the economy right now.

Kate Linebaugh: How big was that rock?

Jon Hilsenrath: The rock was immense. If you look at any charts of economic activity, if you look at GDP growth, if you look at employment, if you look at stock market, the COVID crisis was a huge shock to the economy and we are still seeing a great deal of turbulence in the economy more than two years after COVID first hit. And I think in the same way that it takes water time to settle down after you drop a rock in it, I think it's going to take some time for this economy to settle down into some state of what we might be able to consider normalcy.

Kate Linebaugh: To understand the choppy waters around us, Jon says it's helpful to look at a few key indicators. What are the different measures that give us an idea of what's going on in the economy?

Jon Hilsenrath: All right. So the five key indicators I would say are Gross Domestic Product, unemployment, inflation, consumer confidence, and interest rates. The first one is Gross Domestic Product. It's the government's broadest measure of how much stuff the nation produces. All the restaurant visits that we produce. All the hotel visits. All the cars we produce. GDP contracted in the first six months of the year. Another measure is the unemployment rate. That's how many people who want jobs can't find them. And that's 3.6% of the population that's want jobs. That's exceptionally low. So you see a contradiction there. The job market is strong, even though output is falling. Another measure is consumer confidence. And this is behaving in really odd ways because even though unemployment is low, consumer confidence is at low levels that we typically see in a recession. Why is that? Well that's because inflation is high and that's my fourth measure. The fifth measure I would point to is something called the Federal Funds Rate. This is an interest rate that the Federal Reserve manages and it's pushing interest rates up.

Kate Linebaugh: Right now, these five indicators are behaving in contradictory ways. Taking it back to Jon's metaphor, that means there's still waves in the fish tank. So Jon says to understand what's really happening in the economy, you need to look beyond these indicators, at businesses and consumers.

Jon Hilsenrath: The consumer is me and you and everyone else out there looking, the household, the American household, and what that household consumes. More than two-thirds of US economic activity is derived from what Americans are spending on goods and services, on restaurant visits, on visits to hotels and vacations and new cars and such. So it really matters what consumers are doing out there.

Kate Linebaugh: And what are they doing out there right now?

Jon Hilsenrath: They are at a critical moment. So on the one hand, unemployment is very low. So there's a very large percent of the population is getting a paycheck. That's great news. It's also the case that household savings are very high right now, in part because people got relief checks, in part because people didn't go out. We were stuck in our homes for so long.

Kate Linebaugh: No restaurant meals for us.

Jon Hilsenrath: Right. So people saved up. That's the good news. Unemployment is low and savings high. The bad news is that inflation is also very high right now. So the paychecks we're bringing in aren't going as far as we want them to or need them to.

Kate Linebaugh: And that means some people are starting to cut back on spending. For example, a family Jon wrote about, from Austin, Texas.

Jon Hilsenrath: This is a family of four that routinely makes visits to Disney World and Disneyland, at least two visits a year. During the pandemic, they stopped going. And they booked two trips this year. They already did one trip. On the second trip they've decided the kids are not bringing home the Mickey Mouse swag that they usually bring home because they're trying to cut back. The cost of travel is going up too much. And they didn't cancel the trip to Disney, but they're squeezing how much they plan to spend when they're there. And I think that's a good example of what's going on more broadly in the economy right now. People have a means to spend and a desire to spend, but they're not going to do it if they don't feel like their paycheck is going as far as it used to go.

Kate Linebaugh: And when consumers start pulling back, that affects businesses. No Mickey Mouse merch means less sales at Disney. And Jon says there's already been a slowdown in spending from some businesses.

Jon Hilsenrath: What a business does is they try to have their inventories move in line with their sales. They look at something called an inventory to sales ratio. Well, if sales start slowing because consumers are pulling back, then companies are going to cut back on inventories, and then the wheels of the economy start slowing. And so Walmart is cutting back on its inventories and it's discounting. The good news here for American consumers is maybe that's some sign of relief on the inflation front. We don't know.

Kate Linebaugh: But the problem is if businesses like Walmart begin cutting back on spending, then they might also cut back on jobs.

Jon Hilsenrath: And in a real negative scenario, they start laying off workers. A lot of employers have been stretched over the last 12 months with worker shortages. And if things really slow down, then that worker shortage problem dissipates for them. And potentially we start seeing this really strong job market losing a little heat. And that's, I think, really when you start saying, "All right, maybe this really is a recession."

Kate Linebaugh: And we have seen companies put on hiring freezes. So there already is a kind of sense of caution on the business side of the economy.

Jon Hilsenrath: There's a sense of caution, but I come back to the word turbulence, because so much of it has been industry specific. The tech sector is already starting to pull back, but then you listen to what the automakers are saying. And the automakers are saying they still can't get all the supplies that they need to produce the cars that Americans want to buy. If you talk to a lot of restaurant owners right now, they'll tell you they're still having a very hard time finding the workers they need.

Kate Linebaugh: So you're kind of saying that the picture is mixed. Restaurants on one hand need workers, but the tech sector is slowing down hiring.

Jon Hilsenrath: Right. It becomes a recession when it's broad based. And when these things that we are talking about start feeding on themselves, when consumers pull back in a broad based way, and then it's not only the tech sector that pulls back, but it's also the retailer and the automaker and many other sectors

Kate Linebaugh: Coming up. Can the fear of a recession lead to one? Okay, so let's talk about recession. What is the official definition of a recession?

Jon Hilsenrath: The official definition of recession is not what people think of it being. The official arbiter of recession is the National Bureau of Economic Research. And they describe it as a broadened sustained contraction in economic activity. And they track a number of indicators to draw a conclusion about whether such a thing is happening. The rule of thumb that people often hear as an indicator of recession, and which some countries use, but the United States doesn't is two quarters-

Kate Linebaugh: Quarters of economic contraction.

Jon Hilsenrath: -of contracting GDP.

Kate Linebaugh: Jinx.

Jon Hilsenrath: Right. Yeah, that was good. Except we used different terms. You said economic contraction. It's actually declining GDP. GDP is a measure of economic output. It's a measure of how much stuff we're producing. It doesn't count jobs. It doesn't count income. It doesn't count some of these other factors that the National Bureau of Economic Research counts. So using the rule of thumb that some people like, output has contracted for two quarters and, okay, call it a recession if you want. The National Bureau of Economic Research hasn't declared it that yet. And I suspect, in fact, I don't suspect, I know because we've talked to them about this, they're going to take some time to look at all these cross currents before they make some decision about what to call this thing.

Kate Linebaugh: Can fears of a recession actually lead to one?

Jon Hilsenrath: Emotion and expectations play a huge role in economic activity. Am I going to go on vacation in August? Eh, if I'm afraid I might lose my job, then maybe I'll call it off. Am I going to order from my supplier another 1000 widgets to build another 1000 cars? Well, if I'm afraid that people are going to stop spending money on cars, then I'm going to cut back my orders. So expectations, and emotions, confidence, all have a very big effect on how people behave. There's this scenario where inflation starts to recede. By some measure, it's already happening, right? Gasoline prices have come down. Retailers have been discounting on apparel. If inflation comes down, then that takes pressure off consumers. Good things will happen if it recedes, bad things will happen if it doesn't.

Kate Linebaugh: How much longer do you think we'll have these big waves in the fish tank? When will they settle?

Jon Hilsenrath: I can't say when they'll settle, but I think I can say that they should get smaller. So as you think about the waves on a rock hits a fish tank, the biggest waves are right away and then they settle down over time to ripples. One of the wild cards here is what happens in Europe. Europe has an energy crisis going on. Russia can turn the screws and make the food and energy crisis worse in Europe and worse for the rest of the world if they cut off supplies. And if that happens, then the inflation pressures that we're hoping are going to recede might actually get worse. And we got a real problem on our hands if that happens.

Kate Linebaugh: Is Russia the piranha in the fish tank?

Jon Hilsenrath: Yeah. Yeah. I would say it's a shark because it could cause new splashes.

Kate Linebaugh: So what's your answer to the question of whether or not we're in a recession right now?

Jon Hilsenrath: My answer is that recession is one narrow, poorly understood word. What's my answer? I'll give you an answer that an economist would use maybe. Maybe. Maybe, but I don't think that explains what's actually going on in the economy. I think what better explains it is that we're in a moment of exceptional turbulence that makes people feel bad and could cause activity to get even worse in the months ahead if we don't start seeing some things improve. People use the R word, recession. I would use two T words, turbulence and transition. Turbulence is the story of what happened. Transition is the story of where we are right now. And recession is the story of what we could be about to be walking into.

Kate Linebaugh: That's all for today, Friday, July 29th. Additional reporting in today's episode by Rachel Wolfe. The Journal is a co-production of Gimlet and The Wall Street Journal. Your hosts are Ryan Knutson, and me, Kate Linebaugh. The show is produced by Melvis Acosta Chrishostomo, Annie Baxter, Katherine Brewer, Pia Gadkari, Rachel Humphreys, Matt Kwong, Annie Minoff, Laura Morris, Kim Nederveen-Pieterse, Afeef Nessouli, Enrique Perez de Rosa, Sarah Platt, Alan Rodriguez Espinoza, Vladislav Sadiq, Pierce Singgih, Catherine Whelan and Victoria Whitley-Berry. Our engineers are Griffin Tanner and Nathan Singhapok. Our theme music is by So Wiley additional music this week from Katherine Anderson, Peter Leonard, Bobby Lord, Emma Munger, and Blue Dot Sessions. Fact checking by Nicole Pasulka. Thanks for listening. See you Monday.