Is the Economy Already in a Recession?

In the bi-weekly newsletter Eye on the Economy, NAHB Chief Economist Robert Dietz provided the following overview of the nation’s economy and its impact on the housing market.

Consumer inflation, led by rising rent costs, surged in June. The Consumer Price Index (CPI) posted a 9.1% year-over-year gain, which was the largest since 1981. This was even higher than expected by most economists — and the Fed itself — and shows that inflation in the broadest sense has not yet peaked.

However, an alternative measure used by the Fed, Core Personal Consumption Expenditure (PCE) inflation, likely has peaked. The shelter component of CPI (i.e., housing) makes up 40% of the inflation reading, with rent for primary residences increasing 0.8% in June alone — the largest gain since 1986.

The June inflation data guarantee that the Fed will increase the federal funds rate by 75 basis points during its policy meeting at the end of July. In fact, because June’s inflation measure was worse than expected, there is a rising chance the Fed increases by 100 basis points, pushing the federal funds rate to 2.75% and inverting much of the yield curve. With the 10-year Treasury rate near 3%, the Fed’s projected monetary policy path would take the funds rate to 3.8% by early 2023, which the NAHB economic forecast indicates will bring on a recession.

This raises the question: Is the U.S. economy already in a recession? First-quarter GDP growth was down 1.6%, and we estimate that GDP growth for the second quarter was down by at least 1.5%. This meets the traditional definition of a recession: two quarters of negative growth.

However, the National Bureau of Economic Research (NBER), the quasi-official body for calling recessions, takes a broader view looking for both GDP contraction and labor market deterioration. But the labor market remains tight: In June, the economy created 372,000 net jobs, and the unemployment rate remained historically low at 3.6%.

The recession question is somewhat academic. Whether NBER calls it as such, the economy is experiencing a downturn, with the Federal Reserve aggressively tightening financial conditions, the housing market slowing quickly (as evidenced by six straight months of declining builder sentiment), and hiring freezes and limited layoffs spreading among some sectors of the economy.

The first half of 2022 marked a slowdown that will yield several quarters of weak growth and rising unemployment. This will ultimately lead to an “official” recession, although it will be mild compared to the Great Recession a decade ago.

And recall that although housing market weakness can lead the economy into a downturn, housing is typically the first sector to rebound as markets recover. This will be helped by the fact that there remains a housing deficit in the United States.

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