Four Signs of Slowing

Greg Spears

WHEN I WAS A KID, I remember being puzzled by all the newspaper stories devoted to a recession. First, the articles said that one might be ahead. Then they said it had arrived. Immediately afterward, the stories shifted to, “Is the recession lifting?”

The same loop is starting in my newsfeed now, with daily stories asking if a recession is ahead. It’s a definite maybe, according to the experts, but it hasn’t arrived yet. To my eye, though, it seems as if we’re already there. I take no satisfaction in this judgment, nor—for that matter—in my reduced investment account balance.

I’m sure you see the signs of a slowdown, too. I scan gas stations as I drive, looking for the least-high prices. Would-be homebuyers I know are discouraged because mortgage rates have doubled to 7%. And I’m grateful that my trusty Volvo wagon just passed inspection, as the prices for new ones seem absurd—$50,000 to $70,000.

Of course, anecdotes like these don’t count as evidence. Economists demand objective data, as they should. To be official, a recession must be declared by an eight-member committee of the National Bureau of Economic Research. It’s the keeper of the historical record of the U.S. business cycle.

The bureau defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The last time it declared that a recession had occurred was in 2020. When it did so, the recession had already passed. While we wait for the bureau’s judgment, here are four reasons I think the recession’s already here.

First, by one definition, a recession is two consecutive quarters of economic decline, and we already crossed that bridge this summer. Gross domestic product fell 1.6% in 2022’s first three months, according to the Commerce Department. Then it contracted a further 0.6% in the second quarter, which ended June 30.

Second, the yield curve is inverted. This happens when short-term Treasury notes pay a higher rate of interest than longer-term Treasury bonds. This anomaly occurs when the Fed is putting the brakes on the economy by jacking up short-term interest rates.

The inverted yield curve was first observed to be a recession indicator by economist Campbell Harvey of Duke University in 1986. It’s preceded every recession we’ve had since 1955 and has only flashed a false signal once, according to a research paper issued by the Federal Reserve Bank of San Francisco.

When the yield curve inverted this spring, Harvey said in an interview that the inversion has to be between the two-year and 10-year Treasury notes and last for three months to be a true signal of a recession, and that hadn’t happened yet.

Unfortunately, we’ve now passed that milestone, according to the Federal Reserve Bank of St. Louis. The yield curve inverted briefly back in April and has been continuously inverted since early July. A yield-curve inversion can precede a recession by anywhere from six to 24 months, and it’s been seven months since the first warning flashed on April 1.

Third, the Federal Reserve is not our friend. After the 2008-09 Great Recession, bad economic news paradoxically would send the stock market up, as Wall Street felt the Fed would refill the punchbowl to keep the party going. But it played the part of a host too well, with the hangover of inflation arriving last year. The 12-month inflation rate shot up from 1.4% in September 2020 to 8.2% in September 2022, near a 40-year high.

Now, the Fed’s goal is to cool the economy, and it’s using rough medicine. With its third consecutive 0.75-percentage-point interest rate increase in September, it brought the federal funds rate to the 3% to 3.25% range, the highest it’s been since 2008.

The Fed is also letting about $60 billion worth of Treasurys and $30 billion worth of mortgage-backed securities mature each month without reinvestment, a practice called quantitative tightening that leads to higher interest rates. Fed Chair Jerome Powell estimates this is equivalent to a 0.25-percentage-point rate hike in its effect on the economy.

Higher rates have already cooled demand for big-ticket items like houses and cars, and retail stores are also reporting slower sales this fall. Amazon held a special Prime Day this month to work off its inventories, and reports are that sales were like that of an ordinary day.

Fourth, international trade is slowing, according to the World Trade Organization. Ever since the North American Free Trade Act became law in 1993, U.S. companies were free to seek cheaper labor in other nations and, in return, the prices of food, clothes and TVs dropped for U.S. consumers.

The great English economist David Ricardo proved that both sides benefit from such an exchange, as each nation specializes in what it makes best in a rising tide of commerce. Some one billion people rose out of extreme poverty around the globe over the past quarter century, according to the World Bank, as economic integration grew around the globe.

Now, those immense supply lines have proven fragile, and many goods produced far away are in short supply. I’ll end with one more anecdote. Shortly before the pandemic, my wife and I ordered a new stove for our kitchen. It was coming from the factory and we were told there were “supply chain issues.” More than two years passed as our four-burner worked its way around the world.

When it finally arrived at our door last Wednesday, it didn’t quite fit. We were told it would cost another $318 to install. With the world feeling so completely changed from the easy-money days of 2020, the new stove suddenly seemed like a needless extravagance. The current one works fine and just needs a new vent switch. The store gave us a full refund, and we felt relieved to avoid a $3,800 expense.

Has the recession begun? Yes, and I think I can see it in my kitchen.

Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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