How to Spot A Recession

Predicting the arrival of a downturn is notoriously difficult

- Katia Dmitrieva

When it comes to forecasting a recession, economists today have an incredible wealth of tools and data. Even so, it's still more of an art than a science.

Most economists predict a downturn in the US this year, precipitated by the Federal Reserve's barrage of interest-rate hikes to combat inflation.

Among those surveyed by Bloomberg, the consensus is that the effects of tighter credit on corporate investment and hiring, as well as consumer spending, won't translate into a contraction in gross domestic product until the second quarter.

Yet many anticipate the damage will be slight compared with earlier episodes.

Many countries define a recession as two consecutive quarters of negative growth in GDP, but the US delegates this assessment to a group of elite academics who meet in secret and typically take about a year to make a call. Most times, the verdict comes well after Wall Street has widely recognized a recession.

The trick is catching one before it happens.

Economists, who have had some noteworthy misses on inflation and GDP in recent years, are the first to admit that forecasting the timing of a downturn is practically impossible. That's despite mountains of government and private data, including a slew of new high-frequency measures ushered in by the pandemic. The exercise is more akin to putting together the pieces of a puzzle, with each economic indicator filling in part of an image.

Right now, the puzzle pieces aren't fitting together very well. The manufacturing sector is arguably already in a recession, and the housing market has slumped, yet factory and construction employment remain elevated.