For the past three to four years, we’ve heard rumblings of the U.S. economy heading for a recession. But what exactly constitutes a recession?
Recessions are designated by the National Bureau of Economic Research (NBER), an American non-profit organization. The NBER defines a recession as a significant decline in economic production, income, employment, manufacturing and retail sales lasting more than a few months. In layman terms, it is often defined as two consecutive quarters of negative economic growth. Economic growth doesn’t just decline, but actually contracts below 0%.
The bulk of recession arguments lie with America’s economic cycle. Economies tend to naturally behave like a rollercoaster. Historically, the U.S. economy averages about eight to nine years of economic growth, then dips into recession. Over the past 40 years, we’ve had four recessions: 2007-2009, 2001, 1991 and 1982. The economy then rebounds and the cycle repeats itself. Our current economic cycle is in its 11th year of growth. So, for the past three to four years, many have said the economy is simply “due” for another recession.
Others point to the recent pullback in U.S. economic growth. In 2018, economic growth was a very robust 2.9%. This year, growth has declined from an annualized rate of 3.1% in the first quarter to 2% in the second quarter. This decline, they contend, combined with a severely weak global economy and the U.S.-China trade dispute, will inevitably drive the American economy into recession.
But is the U.S. economy, as many have argued, really on the brink of an economic recession?
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Over the course of my 14-plus years in the capitalism-infused trading pits of Chicago, I’ve learned many hardened truths — one being that the U.S. economy is an extremely durable entity. No, it’s not infallible. But it is capable of withstanding a massive amount of punishment. Moreover, there is one large component of the economy that should alleviate the risk of a near-term recession: the U.S. labor market.
Headlined by an unemployment rate of just 3.7%, the U.S. labor market is the strongest it’s been in 50 years. Annual wage growth is 3.2%, near a 10-year high. The economy is averaging 158,000 new jobs per month, though down from last year’s exceptional monthly average of 223,000. There are 1.154 million more job openings than there are Americans who are unemployed and actively seeking work. March 2018 was the first time in U.S. history the number of job openings exceeded the number of unemployed Americans, a trend that has continued for 17 consecutive months.
Job security and rising wages drive consumer spending, which accounts for more than two-thirds of all U.S. economic activity. Despite a fairly weak start this year from the American consumer, spending has steadily rebounded. In the second quarter, consumer spending surged to an annual rate of 4.7%, the largest quarterly pace of growth in five years. August was the sixth consecutive month of increasing retail sales growth, the longest stretch since June 2017.
Perhaps the greater insight within the U.S. labor market comes from our nation’s employers. Hiring workers requires a confidence in the employer’s financial and economic future. It represents a long-term commitment of time, money and resources to hire and train new employees.
At some point in the future, our economy will go into recession — it’s just a normal part of our economic cycle. But with 1.154 million excess job openings, American employers appear willing, and confident, to stave off those concerns of a pending economic recession.