During 2022, the United States weathered many storms, ranging from inflation, rising interest rates, supply chain disruptions and geopolitical turmoil. Throughout the first half of the year, business transaction activity remained strong but showed declines as the year continued. In the second half of the year, transaction activity slowed, reflecting lukewarm market sentiment as interest rates and inflation climbed casting doubt on future profits. 

Overall, the 2023 general economic outlook for the United States is bleak. A recession, which has been highly anticipated by many economists, institutions, and general speculators, is expected to occur during early 2023. The effects of geopolitical tensions, rising energy prices, increasing interest rates and rampant inflation have all sent signals that an economic downturn is probable. 

In its January 2023 Global Economic Prospects report, the World Bank Group states that “The United States, the Euro area, and China are all undergoing a period of pronounced weakness, and the resulting spillovers are exacerbating other headwinds faced by emerging market and developing economies (EMDEs). The combination of slow growth, tightening financial conditions, and heavy indebtedness is likely to weaken investment and trigger corporate defaults. Further negative shocks—such as higher inflation, even tighter policy, financial stress, deeper weakness in major economies, or rising geopolitical tensions—could push the global economy into recession.” 

So Are We in a Recession Now? 

One general rule of thumb is that two consecutive quarters of negative GDP growth indicate a recession.

 The National Bureau of Economic Research (NBER) provides a more official definition, stating that a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” 

It is important to note that any official declaration of a recession by the government is typically lagging. Said another way, we are typically well within a recession before it becomes formally acknowledged. Formal bodies are generally more hesitant to hastily announce economic downturns, opting to gather and analyze more data, due to the potential market impacts of such an announcement. 

In this two-part series, our Chief Valuation Officer, Scott Gabehart, and Valuation Analyst Ryan Thompson take a look at the traditional measures that have historically been used to predict a recession. In part one, we’ll focus on negative GDP growth and yield curve inversion.

Negative GDP Growth

As we mentioned earlier, two consecutive quarters of negative GDP growth have been the unofficial definition of a recession. The first two quarters of 2022 turned negative, before changing course in the second half of 2022. Although the first half of 2022 met the loose criteria of the “rule of thumb,” a recession was never formally acknowledged as other economic measures did not show similar deterioration. 

The third and fourth quarters of 2022 reflected positive GDP growth of 3.2% and 2.9% respectively, showing a rebound, and therefore negative any immediate recession concerns. Time will tell if experts are correct about anticipated negative GDP growth during the first half of 2023. 

Yield Curve Inversion

Since 1960, the United States has seen seven major recessions, with each being predicted by an inverted yield curve. An inverted yield curve indicates that a short-term U.S. treasury is paying a higher interest rate than long-term U.S. treasuries. 

Said another way, this inverted yield curve suggests that the near-term is riskier than the long-term, which is unusual as the long-term is typically considered riskier as there is a longer runway for uncertainties to occur.

In July of 2022, the first clear inverted curve presented itself – a recession typically follows an inverted yield curve within 6-18 months. While an inverted yield curve acts as an indicator, it does not necessarily imply that an economic downturn is certain, although the metric has a fairly strong track record of being correct. The US Treasury Yield Curve is currently inverted, potentially signaling signs of a recession in the coming months. 

In part two of this series, we’ll focus on the other historical predictors of recessions: inflation, interest rates, public markets, and business transition activity.