If you asked most economists in late 2022 whether or not the U.S. economy would enter a recession this year, the answer would have been "yes." But those economists don't determine if a recession truly arrives. That job belongs to the National Bureau of Economic Research (NBER).
The NBER monitors multiple indicators to make the official call. Is a recession on the way? Here's what the NBER's top seven indicators say.
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1. Gross domestic product (GDP)
Many people view two consecutive declining quarters of gross domestic product (GDP) as a clear signal that the economy is in a recession. However, that's actually only a rule of thumb. Still, though, the NBER definitely monitors GDP closely.
U.S. GDP did fall two quarters in a row in the first half of 2022. Since then, though, the indicator has rebounded nicely. GDP rose at an annual rate of 3.2% in the third quarter of last year. It increased by 2.9% in the fourth quarter.
2. Real personal income excluding current transfer receipts
Personal income is the income individuals receive from all sources. It includes current transfer receipts (i.e., money received for which no services are performed, such as Social Security benefits.) However, NBER excludes those current transfer receipts when evaluating whether or not the economy is in a recession.
Typically, this indicator falls when the U.S. is in a recession. It did decline steadily in the first half of last year. But it was a different story in the second half of 2022. Real personal income excluding current transfer receipts bounced back strongly and finished the year higher than the level from the prior-year period.
3. Nonfarm payroll employment
As you might expect, employment and unemployment rates are especially important to NBER's economists. In particular, they look at nonfarm payroll employment. This metric accounts for roughly 80% of workers in the U.S. whose jobs contribute to GDP.
There's more good news on this front. Nonfarm payroll employment rose throughout 2022. The indicator closed out the year at its highest level ever.
4. Employment based on household survey
The NBER also closely watches another employment indicator. The Current Population Survey (also known as the Household Survey) is reported monthly by the U.S. Bureau of Labor Statistics. This survey targets individuals ages 16 and older who live in U.S. states and the District of Columbia. They can't be in institutions such as prisons, mental facilities, and homes for the elderly. Members of the U.S. Armed Forces on active duty are also excluded from the survey.
This employment indicator is also rising. In December 2022, it reached the highest level ever. Employment rose even more in January 2023.
5. Real personal consumption expenditures
Spending is important to the NBER as well. The U.S. Bureau of Economic Analysis (BEA) releases data on a monthly basis tracking real personal consumption expenditures. This measures the value of all goods and services purchased by (or on behalf of) U.S. residents.
This indicator has declined steadily since October 2022. U.S. consumers appear to be cutting back on their spending, almost certainly in part because of high inflation.
6. Real Manufacturing and Trade Industries Sales
The NBER also keeps up with business spending. Its primary way of doing so is real manufacturing and trade industries sales.
As was the case with personal spending, business spending fell somewhat between September and November 2022. On a positive note, the November number was higher than the prior-year period total.
7. Industrial production
Finally, the NBER actively monitors industrial production. The industrial production index measures the industrial output of all relevant businesses in the U.S. (even those owned by companies outside the U.S.). However, it excludes the output of businesses located in U.S. territories.
Industrial production also declined in the last three quarters of 2022.But the index is still near an all-time high despite this pullback.
What should investors do?
As you can see from these seven key indicators, the results are mixed as to whether or not a recession might be on the way. Some economists predict that the U.S. is more likely to enter a "slowcession" -- a period of moderate economic decline without entering a full-blown recession.
What should investors do with this uncertain outlook? Probably the smartest move is to buy stocks of companies that should perform well regardless of what the economy does. For example, healthcare stocks such as Vertex Pharmaceuticals (VRTX 1.25%) enjoy sustained demand for their therapies in positive and negative market conditions.
The reality is that no one knows for sure if a recession is on the way in 2023. Investors who are prepared for any outcome will likely come out on top.
