How Is the Economy Doing?

The U.S. economy is in a strange place right now. Job growth is slowing, but demand for workers is strong. Inflation is high (but not as high as last spring). Consumers are spending more in some areas, but cutting back in others. Job openings are high but falling, while layoffs are low and … well, it depends what indicator you watch.

This is one snapshot of where the economy stands, based on an analysis of how various indicators compare with their historical levels and whether they’ve been getting better or worse in recent months.

There is no universally accepted definition of a “good” number of jobs or rate of wage growth, which means the exact placement of the various measures is somewhat subjective. Still, the patterns are revealing: The indicators are concentrated in the lower right-hand quadrant, meaning most of the economy is doing well, but slowing down.

Even in the best of times, it can be hard to get a handle on what’s happening in an economy with 150 million workers and $20 trillion worth of annual output. And these are far from the best of times. The pandemic and its ripple effects are continuing to disrupt global supply chains and keeping millions of Americans out of work. The war in Ukraine has pushed up gas and food prices, and added a new source of uncertainty. The Federal Reserve is trying to beat back the fastest inflation in decades — and threatening to cause a recession in the process.

By one common definition, the United States is already in a recession, because gross domestic product has declined for two consecutive quarters. Most economists consider that definition too simplistic, and prefer to look at a broader array of indicators across a variety of categories. They also say that to understand how the economy is doing, it is important to consider both levels and rates of change. It matters, for example, not only whether unemployment is low or high, but also whether it is rising or falling.

It also helps to consider the latest data in historical context. The graphics below show how this economic moment compares with recessions of the past 40 years, using the end of the second quarter as a benchmark. In most cases, the latest numbers don’t look much like the recessions of the past, although many show signs of a slowdown.

Job market

If there is one part of the economy that is clearly doing well right now, it is the job market. Employers have added nearly six million jobs in the past year, and the unemployment rate recently matched a 50-year low. Employers would hire even more workers if they could find them: There were more than 11 million job openings at the end of July.

Still, not everything is rosy. The share of adults who are either working or actively looking for work is still well below its prepandemic level, which helps explain the frequent complaints from businesses that they can’t find enough workers. After months of strong gains, hiring slowed in August, and the total number of jobs remains millions below where it would be if the pandemic had never happened.

Layoffs, as measured through filings for unemployment claims, began rising earlier this year but have since edged back down; however, another measure, from a different survey, did not show a similar increase.

If layoffs pick up, watch out: In the past, when unemployment has increased even modestly, it has almost always meant the economy is in a recession.

Income and Prices

Workers have seen their pay rise significantly in the past two years, as the hot labor market has given workers the leverage to demand raises. Other types of income, including from businesses and investments, have been rising too. The problem is, prices have been rising about as fast — or in some cases even faster.

The National Bureau of Economic Research, the semiofficial arbiter of recessions in the United States, focuses on personal income that is adjusted for inflation and excludes unemployment benefits and other government transfer payments. That indicator is still rising, in part because it measures income in the aggregate — meaning not how much the average person makes, but how much everyone, collectively, makes. When more people are working, overall incomes go up.

Many individuals, though, are falling behind. Inflation hit a four-decade high earlier this year, and though it has ebbed a bit in the past two months, no one is sure how long that will last. Even with the recent cooldown, average hourly earnings have risen more slowly than prices this year, although gains have been stronger among lower earners. Other measures of wages tell a similar story. And even without adjustments for inflation, wage gains have been slowing in recent months — a possible sign that workers’ rare moment of leverage may be nearing its end.

Consumers

Economic indicators might be pointing in different directions, but this much is clear: Americans feel terrible about the economy right now. Consumer sentiment, as measured by a long-running survey from the University of Michigan, recently hit a record low — lower even than in the first weeks of the pandemic, when tens of millions of people lost their jobs overnight.

In the past, falling consumer sentiment has been a fairly reliable recession indicator. Consumer spending accounts for about 70 percent of G.D.P., so when people stop spending, the economy is almost guaranteed to run into hard times. So far, however, Americans haven’t acted on their dour mood by cutting back. Even in the face of high prices, people have continued to shell out for plane tickets, restaurant meals and other small luxuries. And now consumer sentiment is showing some signs of improvement as gas prices fall.

Interpreting the consumer economy is tough right now, however, because of how the pandemic disrupted spending patterns. Many people are eager to catch up on deferred travel and experiences, even if they have to pay more for them, which could cause spending on services like these to hold up even if the economy slows. Spending on goods, meanwhile, soared in the pandemic, as people traded gym memberships for home exercise equipment. Goods spending has now begun to slow. But supply-chain snarls have complicated the picture — rising car sales, for example, might mean that demand is strong, but it also might mean that production problems are easing and that there are finally more vehicles available to buy.

Production

Historically, one of the surest indicators of a coming recession has been a decline in orders for industrial equipment — companies don’t invest in so-called capital goods such as new machinery or delivery trucks when they’re worried that demand is about to fall sharply. Right now, though, those signals are being blurred by the same issues that make it hard to interpret consumer spending data. If manufacturers pull back now, is it because of falling demand, or because they can’t get the parts they need?

There is one sector that is, unequivocally, behaving as if we’re headed for a recession: housing. Ever since the Federal Reserve began raising interest rates this year, builders have been reducing construction, and would-be buyers have been pulling out of the market. So far, however, there is little sign of a surge in foreclosures or of the financial stresses caused by the last housing bust.

A slowdown that stays confined to one or two sectors doesn’t constitute a recession, which by definition involves a sustained decline in activity across a broad swath of the economy. It might not be obvious right away, but when a recession does hit, it will show up in virtually every major indicator.