The REconomy Podcast™: What is a Recession and How Do We Know When One Begins?

In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi discuss how recessions are measured, the broader economic outlook, and implications for the housing market.

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Listen to the REconomy Podcast Episode 44:


“We hope that the labor market continues to remain strong and that the Fed does architect that 'soft landing.' The housing market is slowing in the face of rising mortgage rates and reduced affordability, but that doesn't mean it's headed towards a bust. Homeowners today are in a better position to withstand a slowing economy.” – Odeta Kushi, deputy chief economist at First American


Odeta Kushi - Hello, and welcome to episode 44 of the REconomy podcast, where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hey Mark. In preparing for today's episode, I started thinking about a famous quote from economist Paul Samuelson. In a 1966 Newsweek article, he quipped that the stock market had predicted nine of the past five recessions. Obviously, this was said to poke fun at the fact that the stock market can't accurately predict the economy. But, it got me thinking a lot about recessions. What defines them, what causes them, and whether or not they can accurately be predicted?

Mark Fleming - Hi Odeta. I think those are the questions on everybody's minds these days, the Federal Reserve is tightening monetary policy in an effort to tame inflation. And that has many fearful that a recession is imminent, or that we may already be in one. The Fed is intentionally trying to curtail demand, but it's possible that in doing so there's 'no soft landing,' but that it's overdone, and that throws us into a recession.

Odeta Kushi - That's right. But before we get into the details, what is a recession? How is it defined?

Mark Fleming - Sorry to disappoint here, but the answer may not be as straightforward as you think. Time for one of our walks down economic history lane that we love so much, albeit this time a brief one. In 1974, in a New York Times article, economist Julius Siskin came up with a few rules of thumb to define recession, the most popular was two consecutive quarters of declining GDP. Sound familiar?

Odeta Kushi - Ah, yes, that rule of thumb.

Mark Fleming - Yes, that one. Reasonable enough, a healthy economy expands over time, so two quarters in a row of contracting output suggests that there are serious underlying problems, according to Siskin. This definition of a recession became a, if not the, common standard over the years. But as with all rules of thumb, it was imperfect.

Odeta Kushi - Well, yeah, I mean, by that criteria, then the spring of 2020 was not a recession because we didn't have two full quarters of economic decline. It was more like two months before the economy began to rebound.

Mark Fleming - That's exactly why the National Bureau of Economic Research Business Cycle Dating Committee - wow, that's a mouthful, the N.B.E.R.B.C.D.C., the recession I think was over before they even got to have a meeting - which is the official authority on recession start and end dates, they have a more flexible definition, shall we say? In fact, the committee says a recession quote: involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. That's nice and specific. And they use these these three criteria, depth, diffusion and duration. At least there's alliteration there. They look at measures ranging from real personal income less transfers - I had to look this up to make sure we could explain it - transfers are social security payments, welfare payments, things like that. Non-farm payroll employment, employment as measured by the household survey, because we measure employment in different surveys, and more. We can do another episode on the details of the government's national income and product accounts, which all this comes from. But, you get the point, a lot more than just just GDP changes define whether or not we're in a recession.

Odeta Kushi - So, by that more general definition, the COVID recession probably lasted two months, March and April of 2020, which I imagine would have to make it one of the shortest recessions in history.

Mark Fleming - Indeed, it is. We looked back at every recession since 1918 and found that the recessions on average last about 13 months, there have been a few key exceptions, notably the Great Depression of 1929, which lasted 43 months, and the 2008 recession, which lasted 18 months. But that would make the 2020 recession, the shortest by a big margin at just two.

Odeta Kushi - It was short, but sharp. The 2020 recession contracted our economy by the most since the Great Depression, and the impact of the labor market was also unique.

Mark Fleming - That's right. In your average recession, the economy will contract by about 2% to 3%. The average unemployment rate during these recessionary periods is just over about 6%. The COVID recession contracted our economy by over 10%. And the unemployment rate in March and April of 2020 averaged nearly 10% and peaked at almost 15%.

Odeta Kushi - So, not all recessions are created equal. And we know the COVID recession was unique because it was a services recession, which is a very labor-intensive sector. But, just as no recession is the same, recessions are also not single indicator events. So, what are some signs that people look to to predict recessions?

Mark Fleming - Well, a famous one that's commonly cited is the inverted yield curve. And we're not talking Top Gun. At this juncture, the yield curve plots the yield of a range of U.S. government bonds, from bonds with a term as short as four months, all the way out to the longest 30-year bonds. When the economy is functioning normally, we would expect yields to be higher the longer term the bond, because investors are expecting to be paid more for lending their money to the government - that's what bonds are for - the longer the length of that loan. But when long-term yields are lower than short-term yields, it's indicating that investors are worried about something going on more immediately in the economy, like a recession. This phenomenon is known as a yield curve inversion, and is commonly watched for by measuring the difference in yields between two specific points on the curve, the two-year and 10-year treasury bond difference. That measure has preceded all six recessions of the past 40 years.

Odeta Kushi - But past performance is no guarantee of future results, as they say. Another sign is a decline in consumer confidence because consumer spending is the primary driver of the U.S. economy. When there is a sustained drop in consumer confidence, it could be an indicator of an impending recession. If I, as a consumer, am spooked and hesitant to spend my money, it could slow the overall economy.

Mark Fleming - That makes perfect sense. Economists also look to indicators such as the Leading Economic Index, or LEI, which is published monthly by the Conference Board, and combines a multitude of factors, such as new orders for manufactured goods, the performance of the stock market, claims for unemployment, and many more, all into one index. If we see sustained declines in that it also could signal or spell trouble for the economy in a future recession. But we have to be clear, a lot of these indicators suggest a recession in the future, sometimes, possibly, in the next, say, two years, which is a pretty long period of time economically to forecast the possibility of something happening.

Odeta Kushi - That's a really good point. And there are even more indicators to look to, including some of our favorites in the housing industry. Homebuilder confidence is usually a leading indicator in the housing market and the economy more broadly. But again, nothing is perfect, because economies are complicated. But which indicators today are showing higher risk of recession versus those that are saying recession is unlikely?

Mark Fleming - Would you like me to start with the good news or the bad news?

Odeta Kushi - Always good news first.

Mark Fleming - Okay, good news. The labor market remains very strong, the unemployment rate at 3.6% is very low, and about where it was pre-pandemic. This is a phenomenally good unemployment rate. The U.S. is adding nearly 400,000 jobs a month for the past few months, job openings are exceeding total hires by 4.8 million as of the May number, indicating that employers are still struggling to fill open vacancies. And there are about two job openings for every person unemployed and looking for work. There's a pretty strong labor market right now.

Odeta Kushi - Okay, so the labor market doesn't really give us the sense that we're in a recession right now. But, on the flip side, some of those measures that we just mentioned, are telling us quite the opposite. For example, U.S. consumer confidence fell sharply in June and the expectations index based on consumers' short-term outlook for income business and labor market conditions fell to the lowest levels since March 2013.

Mark Fleming - And that Leading Economic Index declined in June, that was the fourth straight monthly drop, and that yield curve inversion that we were just talking about, is also happening. The yield on the two-year treasury note, relative to the 10-year note is basically inverted right now, as we talk in late July.

Odeta Kushi - So, the labor market is really strong. But these other metrics are pointing to a possible recession in the future. What does it all mean?

Mark Fleming - Well, no single measure, or even all combined can predict perfectly that we will or won't be in a recession. And they also don't tell us about how much, or the likely magnitude of that recession is and they also don't really tell us much about the timing. I mean, some point in the future. Well, I can guarantee there will be a recession at some point in the future. Business cycles, which we have not licked yet, have periods of expansion and contraction, but that contraction can come in different shapes and sizes. It's possible that if and when a recession does come, it could be short-lived and mild.

Odeta Kushi - That's a really good point. And now to pivot a little bit. We are housing economist after all. How has housing fared in times of recession?

Mark Fleming - Well, the housing market has traditionally aided the economy in recovery from recession, as consumers who are less affected by the downturn, are willing to buy and sell, and existing homeowners are able to take advantage of equity in their properties. That creates demand, that creates transaction, that creates consumption activity.

Odeta Kushi - And it's likely that in difficult times, homeowners will stay put while there's economic uncertainty and wait to move until they feel more comfortable, which can help get other parts of the economy moving. But, to answer the question on everybody's mind, if a recession were to occur, and that's an if, what happens to the risk of foreclosure?

Mark Fleming - First, I think it's important that we clear something up a little bit here. Foreclosure is actually a two-step process. First, the homeowner suffers some sort of adverse economic shock, a loss of income due to unemployment, or serious illness or death of a spouse, medical emergency, things like that. That leads to their, what we call, inability to pay their mortgage, also known as delinquency. However, not every delinquency turns into a foreclosure. With enough equity in their home, a homeowner has the option of selling instead of giving the home back as a foreclosure to the bank.

Odeta Kushi - And of course, the reverse is also true. If the homeowner has little equity in their home, but suffers no financial setback that leads to delinquency, then there's no need for a foreclosure. This is what we call the dual-trigger hypothesis. Alone economic hardship and a lack of equity are each necessary, but not sufficient to trigger a foreclosure. It is only when both conditions exist that a foreclosure becomes a likely outcome.

Mark Fleming - Exactly. So, even if home values do experience a dip on a national scale - which, to be clear, we don't expect, we only expect slower price appreciation in the coming year - a slight drop wouldn't instantly lead to foreclosures. I know we're all quick to recall what happened during the housing crisis in the Great Recession. But that was fueled heavily by the fact that job losses - that stress causing an inability to pay and higher delinquency - was also paired with a significant share of homeowners who didn't have equity in their homes and were in negative equity positions. When we look back historically, we often see delinquencies rise in recession because of the economic impacts, and foreclosures don't because of equity. And today, homeowners have a pretty big equity cushion that can withstand some significant price declines and still have equity remaining.

Odeta Kushi - And, in addition to that equity, the vast majority are also locked into 30-year, fixed-rate mortgages, most likely having refinanced during the recent period of historically low interest rates. Indeed, the mortgage debt-to-income ratio is near a four-decade low. With a low interest rate and affordable monthly payments, most homeowners are in a good place if the economy slows.

Mark Fleming - Lots of equity, low debt burden, right. This time, it's different as they say.

Odeta Kushi - Well, we hope that the labor market continues to remain strong and that the Fed does architect that 'soft landing.' The housing market is slowing in the face of rising mortgage rates and reduced affordability, but that doesn't mean it's headed towards a bust. Homeowners today are in a better position to withstand a slowing economy. All right. Well, that's it. Thank you for joining us on this episode of the REconomy podcast. If you have an economics-related question you'd like us to feature on a future episode, you can email us at We love to hear from our listeners. And, as economists, you know we love our metrics and data. So, if you enjoy listening to the podcast, please make sure to give us a rating on your favorite platform. And, as always, if you can't wait for the next episode, you can follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.


This transcript has been edited for clarity.

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