How do we know if we're going through a recession?

As debates swirl over whether the U.S. is headed for a recession, economists and everyday Americans look to multiple measurements to decide.
Posted at 4:26 PM, Mar 31, 2023

The current economy in the U.S. has people on edge.

After reaching the lowest point in a half-century in January, the unemployment rate remains at around 3.6%, and the latest estimate from the Bureau of Labor Statistics had 10.8 million job openings as of Jan. 31. Yet, the most recent data shows inflation remains high, even after cooling a bit since last summer.

All this uncertainty has led to a lot of speculation around recessions and how — for such a massive, economic turning point — it can seem odd that it's not clearer when or if one is happening.

A recession is a significant decline in activity across the economy that lasts more than a few months. Officially speaking, the government counts on one group of just eight economists to judge what's a recession and what's just a rough couple of months.

The decision comes from a committee at the National Bureau of Economic Research, a private nonprofit research organization. The NBER committee looks at a range of economic indicators like employment levels, retail sales and production, plus criteria like how long the decline lasts and how many sectors are impacted.

But the official call may not always be the most useful one, primarily because of how long the decision takes. The team has to wait months to get enough data to feel certain. For example, the Great Recession began in late 2007, but the NBER announcement didn't come until a year later.

Which American cities are experiencing the most inflation in 2023?
U.S. currency

Which American cities are experiencing the most inflation in 2023?

Experts say there are three primary factors causing inflation to skyrocket, with housing at the top of the list.


That's why many policy makers turn to a different guide for recessions: GDP, or gross domestic product, which is the measure of goods and services produced by a country over a certain amount of time.

The popular rule of thumb for predicting recessions is that if the GDP declines in two consecutive quarters, that's supposedly a sign that recession is near. This led to much of the panic late last summer over whether a recession was imminent, since the GDP shrunk in the second and third quarters of 2022.

But even before this current pandemic economy, GDP had been under scrutiny for decades as a way to measure economic health. It doesn't account for things like inequality, quality of production, health or happiness. And even its own creator knew how limited it was.

Economist Simon Kuznets developed the GDP in the 1930s to help make better sense of the Great Depression. But even as he first introduced the concept to Congress, he warned that "the welfare of a nation can... scarcely be inferred" from the country's income. Unfortunately, Kuznets' warning was pretty much ignored on a global scale.

So although using two quarters of shrinking GDP to predict a recession has a strong correlation, it's not an exact rule. At best, the GDP is a controversial tool for measuring overall economic health.

Instead, many observers don't look to research committees or macroeconomics to tell them a recession is coming; they rely on American shoppers.

There are a number of specific goods and services that have been hyped up as indicators of a recession

The "Lipstick Index" or "Lipstick Effect" is one of the better-known signs of economic downturn. It's credited to Leonard Lauder, a former chairman of cosmetics brand Estee Lauder, who noticed that during the post-9/11 recession, there was a rise in lipstick sales.

Sunyee Yoon, an assistant professor of marketing at the University at Buffalo, pointed out multiple research papers in psychology, marketing and economics that have found this relationship between economic recession and the sales of cosmetic products. She explained some possible reasons behind this "lipstick effect."

Fears of recession amid tumbling global stocks, skyrocketing inflation
Pedestrians walk by the New York Stock Exchange

Fears of recession amid tumbling global stocks, skyrocketing inflation

The country's financial leaders acknowledge that navigating to a stable exit from our current turmoil will be tough.


"One mechanism is related to the price of items," Yoon said. "As income declines during the economic recession, women purchase lipsticks or cosmetic products instead of expensive clothing or an expensive jewelry in order to treat themselves in a more affordable way. Then another mechanism is related to mate attraction. So in uncertain economic times, women may purchase lipsticks and other cosmetics to increase their physical attractiveness in order to find a mate, because mating with financially resourceful people can increase their income. And the last one is about employment. So when the unemployment rate is high, which usually happens during an economic recession, then women purchase more beauty enhancing products in order to increase their chances of either staying in their jobs or becoming employed."

There are several other items that are sometimes suggested as indexes like champagne, men's underwear, even revenue at strip clubs. On paper, they may make a lot of sense as goods or services that shrink when money is tight. But oftentimes, these indicators correlate with a few recessions but not all, and there's too little data to be certain.

The stripper index, for example, has plenty of media coverage surrounding it, but the "evidence" is largely anecdotal. There is only one publicly traded company that owns strip clubs, and, for what it's worth, its value was down more than 20% last year.

What's tricky with using consumer behavior is that it can change depending on how people perceive the economy, not necessarily how strong or equal it really is.

"In this experiment, usually participants were divided into two groups, and one group read an article saying that the economic situation is getting worse and worse in this country, and the other group read an article which is not related to economic recession — for example, about architecture," Yoon said. "It actually shows that the group who read an article about the economic recession reported higher interest in cosmetic products compared to those who read another article about architecture."

There isn't a perfect method for predicting a recession; if there was, they'd be easy to prepare for or even avoid. But by incorporating many different methods and sources of data, policy makers and everyday Americans can get a better sense of the economic ebbs and flows and when a recession really is just around the corner.