U.S. recession may have started nearly one year ago, says former Fed adviser
While it might not seem like it, the U.S. economy is exhibiting the tell-tale signs of an ordinary recession, according to former Dallas Fed adviser Danielle DiMartino Booth.
In an interview with CNBC, Booth said the U.S. may already be experiencing a “plain vanilla recession” that began last October. She cited the sharp rise in Chapter 11 bankruptcy filings, higher unemployment, and a lack of housing demand as evidence of recessionary forces.
Booth’s worries are reflected in the latest batches of economic data. On the labor market front, unemployment has increased by nearly one percentage point since the start of 2023, triggering the so-called Sahm Rule recession indicator.
Without fail, the Sahm Rule was observed during every major recession for the past 50 years, according to economists at JPMorgan.
As Creditnews recently reported, corporate bankruptcies have also spiked to the highest level since the aftermath of the Great Recession. So far this year, 356 corporations have filed for bankruptcy, exceeding any comparable period in the past 13 years.
According to S&P Global data, 2024 has produced 17 billion-dollar bankruptcy filings so far.
On the face of it, these indicators don’t necessarily mean the country has entered a downturn. After all, economists typically define a recession as back-to-back quarters of negative GDP growth.
While the U.S. hasn’t crossed the technical threshold yet, that doesn’t necessarily mean that Booth’s recession call is wrong.
The power of revision
Government economists routinely revise economic data months or even years later. The most famous example of this came in the aftermath of the 2008 financial crisis when it took economists years to determine the length and severity of the recession.
In September 2010, the National Bureau of Economic Research determined that the Great Recession actually began in December 2007 and lasted 18 months.
During that time, Americans only found out they were in a recession a year in, according to economist Peter Schiff. “We were almost out of the recession by the time the government told us we were in it,” he said, drawing parallels between today’s economy and the one that preceded the Great Recession.
Government economists revised their GDP estimates as recently as the first quarter of 2024. According to the Bureau of Economic Analysis, the U.S. economy grew at an annualized rate of 1.3% in the first quarter, lower than the previous estimate of 1.6%.
The Q1 update “primarily reflected a downward revision in consumer spending,” government economists wrote in May.
Consumer spending happens to be the largest component of the U.S. economy, accounting for a staggering 68% of GDP.
Economist and Queens’ College President Mohamed El-Erian also worries that the economy is quietly teetering on the brink of a recession.
In El-Erian’s estimation, there’s a 35% chance that the U.S. will enter a downturn in the foreseeable future, largely because of policy failures by the Federal Reserve.