Recessions often appear crystal clear when analysed in retrospect. It’s easy to sit back, glance at the Bloomberg screen, and spot the evident recession we had in 2008 or the dot-com bubble of 2000.

However, discerning whether an economy is on the brink of a recession, or even if it is already are in one, is considerably more challenging. Recessions often become obvious only once they are well underway, and by then, significant economic damage may have occurred. For instance, during the GFC (Great Financial Crisis), many viewed Lehman Brothers’ collapse in September 2008 and the simultaneous surge in unemployment as the onset of the recession. However, the recession started almost a year earlier in the fourth quarter of 2007. This shows that by the time most people realise there’s a recession, it is typically already in full swing. Additionally, macroeconomic data poses another challenge in early recession identification because it tends to be lagging and subject to sharp revisions, altering the perceived state of the economy. Looking back at the GFC, labour market data in early 2008 still was showing a picture of positive job growth, suggesting economic robustness. It was only after subsequent revisions that these numbers were adjusted to reflect negative job growth, exposing the real extent of economic deterioration. These dynamics highlight why recessions seem obvious only after substantial damage has unfolded.

With that in mind, what can we discern about the current state of the US economy? Macroeconomic data doesn’t paint a bleak picture: the labour market appears robust and real growth is decent. Additionally, equity markets are at or near all-time highs while credit spreads remain historically low, suggesting that investors’ confidence in the economy’s durability is strong. But what if this perception is wrong? What if the US is on the edge of a recession, or even, what if it is already in one?

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