Is the US Headed for Recession?

Steve Odland: Welcome to C-Suite Perspectives, a signature series by The Conference Board. I'm Steve Odland from The Conference Board and the host of this podcast series. And in today's discussion, we're going to talk about the state of the US economy and specifically whether we're headed for a recession. 

Joining me today is Yelena Shulyatyeva, senior US economist for The Conference Board in our Economy, Strategy & Finance Center. Yelena, welcome.  

Yelena Shulyatyeva:It's a pleasure to be here.  

Steve Odland: Yelena, I know everybody hears about recession, and you read in the newspaper, but what really is a recession? 

Yelena Shulyatyeva: OK. The official arbiter of recessions, the National Bureau of Economic Research, has a definition, and let me just quote it: it's a period between a peak and a trough in economic activity, during which a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. 

So the definition avoid s any definition of how much and how much the activity is declining. It doesn't necessarily need to decline, even, for that to be a recession. We saw it back in 2001, for example. Instead, the committee relies on a bunch of indicators, a bunch of economic indicators. Not just one such as GDP, for example, but it also looks at employment, it also looks at business sales, industrial production, and real income growth. So when they look at all these indicators, they conclude, OK, this was a significant slowdown in economic activity, and this way they would say, OK, this was a recession starting in the quarter of such and such.  

And it's interesting that over the period of time, say, in this last century, we saw recessions without a decline in GDP. That was 2000, back in 2001. Or we saw a significant decline in economic activity, peak to trough, and that is an example of a COVID recession. 

Steve Odland: And because it's defined in this qualitative fashion, peak to trough, it is done retrospectively. So they never, I shouldn't say never, but it's not called when you're in the middle of it, it's called afterwards.  

Yelena Shulyatyeva: It takes months for them to do that because they absolutely need to make sure that they are right. And the data gets revised, remember, so it does take time.  

Steve Odland: It takes time. Now, that's the official arbiter. That's the official view of it. But the unofficial view is Because you have to have, everybody else has to have some sort of view. But the unofficial view typically is, what, a couple quarters? 

Yelena Shulyatyeva: A couple of quarters of negative growth.  

Steve Odland: So that'san easier, although inaccurate in the broader terms, but it's an easier way to think about.  

Yelena Shulyatyeva: Technical recession, as they call it.  

Steve Odland:Yeah. OK. So that'svery helpful. How do you know when you're sitting in one if it's only determined after the fact? 

Yelena Shulyatyeva:I think you look at the same data the NBER looks at, and particularly, you look at employment growth, and you look at business sales, and you look at what is happening to consumer income growth. And all these things, if they start deteriorating all of a sudden, by the time you're there, you will know. 

The problem is how we forecast it to happen. Soit'svery difficult to forecast a recession before it happens. Usually, it's not a really good business to forecast recessions.  

Steve Odland:That's your business.  

Yelena Shulyatyeva:That's right. But we can assess the risks, I think.  

Steve Odland: So your point is, you may not be able to put your finger on the exact definition because it's a confluence of multiple data points and you may not know technically, you may not know officially whether you're in one, but there's enough going on around you from a negative standpoint, a slowdown standpoint, that you have a pretty good idea that it feels like this is recessionary, yeah?  

Yelena Shulyatyeva: Totally.  

Steve Odland: So then how do you know when you're out of one?  

Yelena Shulyatyeva:Yeah. Activity starts picking up and that in some industrial data, in some consumer data, as well, things are starting to move in the right direction. Consumers start buying goods and services, and this is probably one of the first indicators. One of the first indicators, as well, will be sentiment indicators that will tell us that people, businesses, or consumers are feeling more optimistic about.  

Steve Odland:So consumer confidence is an important—  

Yelena Shulyatyeva: Absolutely is an important indicator.  

Steve Odland:Yeah. Now are we in a recession today?  

Yelena Shulyatyeva:Absolutely not. I think the state of the labor market is absolutely inconsistent at this point with the definition of a recession. I think the risk of one coming up has increased, but it's not high. Still, it's not high. Actually, in his recent press conference, Chair Powell said exactly that. The probability of recession has moved up, but it's not high. So I think this is very very key at this point because we are in a period of very high uncertainty, and uncertainty is bad for growth. 

So we extensively discussed it with you that uncertainty is really detrimental for businesses and consumers. And I think because of that, the risk of a recession is higher.  

Steve Odland:It's higher, but not high. But not high. In total, it's under 50% still. And you make a good point, which is that you can create a recession. If everybody is so pessimistic, driven by uncertainty, it could be self-fulfilling, which, of course, nobody wants.  

Now, the other point you made, which is interesting, you mentioned jobs. The employment situation. Most recessions are also accompanied by a lot of layoffs, job losses, right?  

Yelena Shulyatyeva: And you're bringing a very good point about layoffs, and I think this will be a very key determinant, if it happens, of what a recession is. So I think, at this point, we see layoffs being very low. And we think that it will continue, at least from the perspective of business leaders and what we read in things like Beige Book or other anecdotal evidence. 

Steve Odland:So are layoffs a leading indicator or a lagging indicator of a recession?  

Yelena Shulyatyeva: It's a big question, actually, and economists don't necessarily know. Theoretically, it's a lagging indicator because when economic activity slows, companies see that and they say, OK, we don't need that many people to support business, so in that sense, it's a lagging indicator.  

But at the same time, if layoffs are starting to increase, for example, that means consumers have less money, less wage income in their pockets, and they will pull back on consumption, which by itself could cause a slowdown in economic activity. Soit's a chicken-and-egg issue, I would say. That's what I'm trying to say.  

Steve Odland: And the consumer is really important to the US GDP.  

Yelena Shulyatyeva: Totally.  

Steve Odland: Makes up what percent?  

Yelena Shulyatyeva: More than two-thirds of the economy.  

Steve Odland: So nearly 70%. Therefore, what the consumer is doing, consumer confidence, as you've mentioned, but also their ability to spend from employment, because most US households live paycheck to paycheck. Whether that's good or bad, indifferent, we're not commenting on that, but the point is, that constant wage, and therefore employment, is important to the US consumer, which is important to US GDP. It's tied in, whereas other economies are not so reliant.  

Yelena Shulyatyeva:As long as we have that labor income coming in, I think we are safe from the recession now. 

Steve Odland: OK, so this is a really interesting point because we had a recession, a short one, due to COVID when the economy was relatively shut. And there were enormous layoffs, and we had high unemployment.  

Yelena Shulyatyeva: 9% decline in GDP, peak to trough.  

Steve Odland:Big difference. So that, but those layoffs were very short-lived. And then, you had companies really experiencing a difficult time refilling those skill sets. And so there's a kind of a new mindset among businesses, among CEOs, CHROs, that we're going to skill back. In other words, we're going to keep our people. And we'll cut everything else we can cut. But don'tdamage, becausewe're at historically low unemployment. There's a skills shortage, yadda.  

I guess where I'm going with this thing is, even if everything else slowed, this may be, this period may be different because of attitudes related to keeping people.  

Yelena Shulyatyeva: Some people call it labor hoarding, which the definition I don't really like with respect to people and employees. But the bottom line here is that yes, it could help us insulate from an economic downturn if we continue to employ people to pay them so that they have income, and they can continue spending, even though they may slow down significantly. It's not a definition of a recession  

Steve Odland: Right. Sometimes job cuts happen, layoffs happen, because production needs to decline because demand is slower. Sothere's a supply and a demand element to all of this. Do you want to describe that?  

Yelena Shulyatyeva: An easy description of that is, yes, so if the company sees that demand for their goods and services is falling, they need to keep costs in check. They need to cut the labor force. And what you describe is that they did exactly that during the COVID recession, but to such a degree that they were unable to rehire all these people in quantities they needed following that trough inactivity. The fear is still quite alive, I think, in that sense. And I think that's not what we are going to see this time around.  

Steve Odland: But you have forecast slower growth. And so things are slowing down, there's a lot of policy uncertainty, as we've discussed. People, companies may take a different approach in the sense that they may not be a mass layoff. But there could be other actions taken, and wages is one area they could look at.  

Yelena Shulyatyeva: Absolutely. It's interesting that the data is showing wage growth is slowing already. It's been slowing significantly since COVID and post-COVID period. The wages of people who switch jobs and those who are stay at companies they are employed at, that growth has converged recently to almost identical. So that means that, not only the company—  

Steve Odland: It doesn't pay to job hop.  

Yelena Shulyatyeva:Basically, it's not only the companies that are not willing to lay people off. People don'twant to really to switch jobs, either. This by itself, I think, is creating a quite a dangerous situation of an environment at which the labor market can improve or can go worse. Because it's a very stable situation in the labor market right now. The risks could be both to the upside and to the downside.  

Steve Odland:We're discussing the current state of the US economy and whether we're headed for a recession. We're going to take a short break and be right back.  

Welcome back to C-Suite Perspectives. I'm your host, Steve Odland, from The Conference Board. I'm joined today by Yelena Shulyatyeva, the senior US economist for The Conference Board in our Economics Center.  

So Yelena, before the break, we were talking about the official definitions of a recession, what are the measurements, who calls it, all that kind of stuff. But even if GDP doesn't go negative, per se, in other words, it can stay positive and still be in a recession because there's all these other factors. But when it really slows, it feels recessionary. And businesses then pull back in their spending. That slows it even more. Your whole point on, it's either chicken or the egg, but it still can hurt the economy, even if it's not an official recession. 

Yelena Shulyatyeva: That is totally right. I would describe a GDP chart, so just think about it this way. Growth goes up and down. So when GDP growth slows down to 1% year over year, at this point, if you look at the history of GDP, it never goes up after that. It goes down, and falls into a recessionary territory. 

Steve Odland: Wait a minute, let me make sure I understand. If it hits 1%, it typically is going to go further.  

Yelena Shulyatyeva: Correct.  

Steve Odland: OK, got it.  

Yelena Shulyatyeva: And this is what we refer to as a stall speed in economic growth. It'sa very dangerous situation because no, you're not in a recession at this point. But the risks that you will go into one increase significantly at that point. 

Steve Odland: OK, now you have GDP growth, which is one factor in the technical recession is, as you said, at least two consecutive quarters of negative growth. But a big piece of that is inflation, and it's all intertwined. Talk about how inflation can affect recession or nonrecession. 

Yelena Shulyatyeva:They're obviously interrelated. Usually in an ideal world, if growth goes up, inflation will follow. It's a lagging indicator. And if growth slows, inflation will, too. But there are some situations, and we are right in that kind of a situation right now, when these two can go into separate ways. 

So we see a slowdown in GDP growth, particularly this year, as certain policies will presumably hurt growth. But at the same time, the same policies, such as tariffs, will raise inflation most likely. And inflation is expected to increase. Actually, at the latest FOMC meeting, that's exactly what we saw policymakers are forecasting. They upgraded their forecasts for inflation, but they significantly downgraded economic outlook. So what do you do in this situation? What as a central banker would you do? So I guess the Fed will remain patient and see which way it resolves.  

And our expectation at The Conference Board is that slowdown in economic growth will push inflation lower eventually. And this is the key word. We may see inflation going up In the meantime, maybe in the middle of the year and towards the end of the year, but ultimately, slow economic growth will weigh on inflation, and that will go down.  

Steve Odland:Yeah, it then brings into play a very difficult economic situation called stagflation. Describe what that is.  

Yelena Shulyatyeva: OK, we are talking about definitions here today, so let's talk about that one. Stagflation doesn't have any numerical thresholds, either.  

Steve Odland: Not that one, too?  

Yelena Shulyatyeva: Not that one either. I would say that stagflation has three key determinants. So one is high inflation, and this is probably what we are going to see. 

Steve Odland: And high meaning what rate level?  

Yelena Shulyatyeva: Above 2% target, but significantly above. The second element is stagnant economic growth.  

Steve Odland: GDP growth.  

Yelena Shulyatyeva: GDP growth. We may see that coming, as well. But the third element is actually inflation expectations. This is what people and businesses, consumers and businesses, expect inflation to become over the medium term. So do they think it's going to get totally out of control? And here, belief in what the central bank will do comes into play, and I think the Fed still has confidence that they will be able to control for inflation.  

And actually, this time around, they have a lot of room for maneuver.So if they see inflation rising, they can raise rates. If growth slows significantly and unemployment rate starts rising, they can cut rates this time around. We're not at a zero low bound this time around.  

Steve Odland: OK. So the stagflation thing is, that'sa bad thing to be in because you've got high inflation, low growth. 

Typically if you've got high growth and high inflation, you can cut rates.  

Yelena Shulyatyeva: You can raise rates and that will slow down growth.  

Steve Odland: And vice versa, whenthey're moving together. When it's not, then your options are limited at that point.  

Yelena Shulyatyeva: And that's why the Fed is choosing to wait. They are choosing to be patient at this time and to see which way it resolves.  

Steve Odland:Yeah, and patience just means they're not going to lower it.  

Yelena Shulyatyeva:Yeah, correct. Like they will probably stay at where they are for a few months.  

Steve Odland:Yeah, and so this is the thing we don't want to get into is stagflation. 

Yelena Shulyatyeva:It's a nightmare for every central banker, for sure, because of what happened back in the '70s, for example. At that time, inflation was high. There were a few oil shocks, et cetera, growth was slowing, but the key difference from today, is that there was no belief the Fed will be able to conquer it because it was very political. And that's why Fed independence is so key in this environment.  

Steve Odland:Yeah, and they are independent, but politicians always complain and try to put pressure on the Fed in order to meet their political goals. You see this all the time, but they truly are an independent body. 

Yelena Shulyatyeva: Absolutely. I truly believe in Fed independence.  

Steve Odland:Yeah. And now, if you've got, if you have this situation, sometimes it's driven by underlying big macroeconomic factors. Sometimes it's driven by geopolitics. Sometimes it's driven by oil shocks, which is a big cost in the economy. This time's different in the sense that it's being driven mostly by policy. 

Yelena Shulyatyeva:Don't say "this time is different" to an economist, but yeah.  

Steve Odland: But every time this is unique.  

Yelena Shulyatyeva: This is another interesting point that we have seen tariffs driving inflation higher. We saw that back in history, it's not something very unusual. It was very interesting, Chair Powell in his recent press conference, referring to tariffs inflation as transitory. That forbidden word he used again. Why forbidden? Because they used transitory back during COVID when inflation was getting out of hand and they waited too long.  

Steve Odland: But did they use the term transitory as it related to inflation because they thought that the supply chain would get back? This time are they using transitory because they think the tariff impact will be short-lived?  

Yelena Shulyatyeva: I think so. At least it was reflected in their summary of economic projections. The way they project inflation was that they see a pickup in inflation, significant pickup in inflation in 2025. But after that, it goes down closer to target.  

Steve Odland: Which is your forecast.  

Yelena Shulyatyeva: Which is what our forecast is.  

Steve Odland: And so you have inflation hitting the target sometime in '26.  

Yelena Shulyatyeva: Right?  

Steve Odland: And you also have Fed rates normalizing, after a few cuts, by then, as well. But this is all dependent on some normalization of tariffs, as well. 

So a tariff is a fee put on goods coming into a country at the border. The revenues go into the coffers, the US government coffers. But that cost then has to be borne somewhere in the supply chain. either a combination of the companies and/or the end consumer. That is what you are calling inflationary. 

Yelena Shulyatyeva: That is correct, and it has to be consistent. Not just the one-time price increase in the level, but it has to constantly continue to be reflected in the months-on-months changes in, say, CPI index.  

Steve Odland: And how long, how high would tariffs have to go for it to really impact inflation?  

Yelena Shulyatyeva: Again, I don't have a numerical threshold, but our research shows that if we see, say, a combined impact on from China tariffs and from Canada and Mexico tariffs as they were discussed, in the order of 25%, that could bring down GDP growth by almost a percentage point. And that could raise inflation by something like 0.6 percentage points.  

Steve Odland:So is that in your forecast?  

Yelena Shulyatyeva: Partially, again, because we didn't see a full implementation of what was discussed with respect to tariffs.  

Steve Odland:So your point is, if the April 2 25% tariffs go through, both China and Canada and Mexico, so you're not talking about the rest of the world, but you're just saying that much could impact growth by a hundred basis points. 

Yelena Shulyatyeva: Correct.  

Steve Odland: And so instead of 2%, it could be closer to that 1%.  

Yelena Shulyatyeva: To that 1%,that is very dangerous for the economic outlook.  

Steve Odland: And because tariffs are inflationary on top of that, you have inflation going up, you have growth coming down, hence the worries about stagflation, which becomes a morass that it'svery difficult for policy makers to get out of. Now, on the other hand, if it's caused by tariffs, couldn't those tariffs be reduced or reversed and therefore fix it?  

Yelena Shulyatyeva: Our forecast also assumes that these tariffs stay in place for at least four quarters for that to have a detrimental impact on the economy. So that'sa caveat here. So the back and forth, the seesaw in tariffs discussions, it's detrimental because of a different reason. It's detrimental because of uncertainty, and we discussed how it impacts economic activity.  

Steve Odland:Yeah. And basically, so I think what I hear you saying is that, even if it's short term, even if it's a couple of quarters of tariffs and it's all negotiations, folks, and everything gets normalized, that's still going to have a real impact because uncertainty in the business world creates less growth. 

Yelena Shulyatyeva: I think you're summarizing it very correctly. So a part of it is already implemented tariffs, say on China products, on China imports. But the other part is uncertainty, and by some estimates, if it stays for a long period of time, uncertainty doesn't go away, that could be comparable to the tariff's impact. 

Steve Odland: Because then business investment comes down or is not implemented. And there's a ripple effect that goes out for quite some time, depending on the length of those investments.  

Yelena Shulyatyeva: If you don't invest, you don't hire. And that's that is a feedback loop. 

Steve Odland: And you're not buying capital equipment, so those orders don't go through, and those manufacturing jobs aren't there. And you can't turn that on and off like a spigot. It takes longer.  

Yelena Shulyatyeva:That even affects it even more if that happens.  

Steve Odland: OK. The other thing is, there's US debt now. You can't turn on the television without hearing this, which probably is a good thing because we needed some awareness, but it's exceeded $36 trillion in debt. And you have this whole DOGE effort right now, that they're trying to find spending cuts to cut that. But spending cuts from the government also impacts GDP growth. 

Yelena Shulyatyeva: It means fiscal policy becoming more restrictive, and restrictive fiscal policy is bad for growth. I don't know how much in terms of a restriction we're going to get. DOGE cards are not that large in the big scheme of things. Soit's very hurtful for certain people, but in terms of a larger economy, they'reactually pretty small. And we are going to get, probably, an extension of tax cuts. So that is a much bigger component of the fiscal policy.  

Steve Odland: But they're talking about a trillion dollars’ worth of cuts. Now, whether that actually happens is a separate issue. But if it was truly a trillion dollars’ worth of cuts, that is material. 

Yelena Shulyatyeva: Yes, but there are talking and doing. So these are two different things.  

Steve Odland:That's the point. But if there really is a trillion dollars’ worth of cuts, you're going to feel it in the GDP at that point.  

Yelena Shulyatyeva:You're going to feel it in GDP. You're going to feel it in the labor market, as well. So what is happening right now is those government workers who were laid off, they will go to the private sector, at least some of them will. And they will look for a job at the time when the hiring rate is actually declining, the hiring rate in the economy is declining, and it's very low by historical standards.So we may have a situation, an unfortunate situation, when government workers look for jobs at the time when they're not available, and that could push the unemployment rate higher. 

Steve Odland: You also have a situation, which is an historic situation, where baby boomers are retiring at the rate of 10,000 people a day because you've got this big demographic shift, the end of a generation. And soyou've got that feeding into it. So it really is an interesting time. So let me just make sure I have this right. And you tell me if I've got it.  

Are we in a recession? No, but growth is slowing, and we have a situation where inflation is probably going to kick up here a little bit. And a lot of this is driven by tariffs and policies, which may be short term, but may not. But even if they are short term, it's going to have a little longer-term effect. But it means that there needs to be some resolution relatively quickly in order then for us to resolve all this within a year or so and get back to some level of normalcy.  

Yelena Shulyatyeva:I think you hit the nail on the head. I think that's exactly it.  

Steve Odland: And if we're wrong, uh oh.  

Yelena Shulyatyeva:Let's hope we are, and let's hope that we don't have to talk about recession now or any time soon.  

Steve Odland: Or stagflation, yeah.  

Yelena Shulyatyeva: Or stagflation, for that matter.  

Steve Odland: Yelena, thanks for being with us.  

Yelena Shulyatyeva: It was a pleasure. Thank you.  

Steve Odland: And thanks to all of you for listening to C-Suite Perspectives. I'm Steve Odland, and this series has been brought to you by The Conference Board.