Are We in a Recession?

Dave:
A couple weeks ago, economic alarm bells went off when this key economic indicator signaled that the US might be in a recession. And this was followed by a bunch of articles, analyses, hot takes, people were talking about it. But the fact is, the way that recessions work, at least officially in the United States, is that we don’t know if we’re in one and if a recession is happening until months after it starts, and maybe not until after it ends. So we’re actually just living in this sort of economic gray area, and today we’re going to break down different analyses that are out there and give our own thoughts on whether or not we are in a recession. Hey everyone, it’s Dave. Welcome to On the Market. I’m really looking forward to our discussion today because I have my two friends here today, Kathy Fettke and Henry Washington. Kathy, how are you?

Kathy:
Wonderful. Excited to talk about this.

Dave:
And Henry, how’s your day going, man?

Henry:
Fantastic. What’s up

Dave:
Folks? Just to set the stage before we jump into our little conversation, debate, the economic indicator that went off, the flag that went up is something called the SOM rule, SAHM. It was theorized by economists Claudia Som, and basically this rule looks at the unemployment rate and how quickly it’s going up. Officially, it’s defined by when a three month moving average of the unemployment rate moves half a percentage point higher than any point it’s been in the last year. But basically it just means when the unemployment rate starts rising pretty rapidly, that signals the beginning of a recession. And when we got last month, so July’s unemployment numbers, that happened, and so the recession indicator went off. So today our panelists and I have come prepared with our favorite recession indicators. We’re going to talk about the current economic climate, and at the end we’ll answer for ourselves whether or not we think we are in a recession.
And just one last thing before we get into that. If you’ve heard this idea that the definition of a recession is two consecutive quarters of GDP decline, that is a very commonly used definition. It was actually invented back in 1974 and is adapted by a lot of different countries. The US has actually never officially adopted that definition. Instead, what we have is a panel of academics at the National Bureau of Economic Research, and they basically look at a bunch of different variables to decide whether or not we are in a recession, when it started, when it ends. And that has always been the case. I know there has been a lot of narrative that they’ve changed the definition. The fact is, and it’s frustrating, there’s never really been a solid definition in the United States of what recession is or not. Other countries have more clear definitions, and that’s what gives us the opportunity to make this show. We are just as qualified as everyone else to make guesses about whether or not we are in a recession right now, and we are going to exercise that right today.

Kathy:
My question, Dave, is, was Claudia Som ever in a pandemic? Because it was so funny to see the headlines everywhere. The chickens were out again, just like, ah, ah, another scary thing. And it’s a noise that this has been true before, but maybe not during a pandemic when we had a massive amount of job growth because people were coming back to work, it was all skewed. So of course there was going to be a slowdown. It’s just skewed and it just cracks me up. How many news outlets made this their headline and freaked people out?

Dave:
Well, I should mention one that the Psalm rule, the reason it people were freaking out is because it is undefeated. It is like one predictor that has always been right. But I read an article that interviewed Claudia Sa about this, and she was like, I actually kind of think it might be different this time. That’s hilarious. I was going to bring this up later. And she was like, it’s a rule. It’s not actually a rule. She’s looking at historical data and said, Hey, look, every time there’s been a recession, this has happened beforehand. Of course, that is not necessarily going to happen every single time. So we’ll talk about that more in just a minute. I wanted to ask you guys what your favorite recession indicators are, because there are some pretty funny ones out there. There are some I really like. But Kathy, is there one that you actually seriously look at and think about as an indicator of recession?

Kathy:
Yeah, I mean, mine’s going to be boring and not exciting. It’s just something I look at. And when I first got into real estate and was first doing news for real estate, it always came up about new construction. And I didn’t really understand why new construction was so important to the economy, but it kind of makes sense. There are so many jobs involved with building a new house and so many things that need to go in so many supplies and materials that need to go into building that house that really, really is good for the economy and the GDP. So when there’s demand for housing and there’s new construction and people can buy and afford those homes, it’s very good for the economy. But when that slows down, that’s a big sign. So for some reason in 2024, we haven’t really seen that so much. In fact, new construction has been pretty strong compared to the sale of existing homes, probably because builders can negotiate a little more, they can lower those interest rates by buying down the rates. And then also there’s been a lot of renovation for people staying at home. They’ve been still keeping the economy going by buying stuff for their renovation projects. So, so far we haven’t seen this metric, but we don’t want to see it. Right. So that’s, I’ve been watching.

Dave:
Yeah, I think that’s a really good one. I read recently that housing in general contributes 16% of GDP, which is enormous. I forget what percentage new construction is, but it was the majority of that, I am pretty sure. And so clearly that’s super important. And new construction is down a bit from the pandemic highs, but on a historical average, it’s actually doing pretty well, especially since the great recessions, it’s still at pretty solid numbers. So that is a good indicator. Henry, what’s your favorite recession indicator?

Henry:
Jokingly, it’s related to the amount of people willing to order online groceries. Is

Dave:
That a real one or did you make that

Henry:
Up? No, I made that up. No, it’s not a real recession indicator. It’s a Henry indicator. No, but in all seriousness, when people are less willing to pay a little extra for conveniences, then that’s when I think people are really feeling a squeeze in the economy. Now, does it actually relate to an actual recession? TBD? But it does give you an indication of whether people feel like we’re in a recession,

Kathy:
You’re cracking me up because I have never ordered groceries online. I am too cheap to do that. You guys recession or not? Maybe I’m just old.

Dave:
I go to the grocery, I just like touching all the stuff. I get excited. Go to the grocery store. It’s fun. Me

Henry:
Too. You ain’t got kids, Dave, so that makes sense. Yeah,

Dave:
That’s true. That’s true. I don’t. So we’ll see. We’ll see what happens if we do. Well, my favorite economic recession indicator is that it is pretty reliable. I don’t think it’s as undefeated as the SOM rule, but when the sale of men’s underwear declines, it is a sign that a recession is imminent. This has happened many times in history per Henry’s point about people not wanting to spend money on conveniences. Well, men consider underwear or at least new underwear, a convenience that they might not be willing to purchase when economic times are difficult. So I don’t have any data on whether meds, underwear, sales are down right now, but if you have any information on this, please let us know. That would really inform this conversation.

Kathy:
Once again, telling our secrets. I don’t think rich buys new underwear a lot, recession or not. Don’t tell ’em I said it though.

Henry:
I will buy new underwear, but where I buy them from depends on how the economy is going. If money’s good, we’re getting Duluth underwear. That’s like 20 bucks a pop. But if money’s tough, ain’t nothing wrong with some Hanes from Walmart folks.

Kathy:
Or just skip the undies, skip the panties altogether. It’s a lot

Dave:
Cheaper.

Henry:
You guys.

Dave:
Alright? Somehow this show has devolved completely

Henry:
Devolved. You are welcome.

Dave:
Yeah, well, I brought it up so it’s my fault. Okay, so now we have a couple of new ways to look at what signals a recession. I might adopt Henry’s grocery pickup index as my new personal standard. But before we move on, we do have to take a quick break, but stick around. The discussion is about to heat up.
Welcome back to on the market. Let’s jump back in. These recessions are super interesting, but I’m curious, this is sort of a hard question, but do you both have an idea of to you what a recession means? Because GDP decline, that’s a commonly accepted one, if that’s your accepted definition. That’s totally fine. Again, when you look at the National Bureau of Economic Research, they define it as something super vague, a significant decline in economic activity that is spread across the economy and last more than a few months. And if you actually dig into it, they say that the things that they really care about are production. So how many goods are produced, employment, real income, and other indicators. So are there any particular things that you look at maybe in your own life to assess should I sort of tighten the belt a little bit or think about things differently for the next few months? Henry, I’ll start with you, man.

Henry:
Gosh, I am just going to call a spade a spade. I don’t care. I don’t care if we’re in a recession or not based on what indicators are saying. What I care about is how the general public or people feel about what’s going on in the economy. Because how they feel about what’s happening dictates how they spend or don’t spend it dictates if they’re going to list their house and or not list their house for sale. And so I’ll pay attention to the headlines just to understand what’s the general sentiment out there. And then I want to know what are people actually doing with their dollars and what they’re actually doing with their dollars will help me dictate as an investor how I might need to pivot and or not pivot, or how I might need to hold onto a property versus sell a property. I’ll pull my hair trying to figure out what indicator means what and who when, and all of that. I don’t care. It doesn’t mean anything to me. What I want to know is how are people reacting with their dollars? Are they being tighter with their dollars because they need to make it stretch more for basic human life goods like groceries and putting a roof over their head, or are people spending more frivolously? So I’ll look into things like that, but the indicators just, I don’t know, maybe I’m just a weirdo.

Dave:
No, I actually agree. And I was wondering if we should make this show, because my personal opinion sometimes is that whether we’re in a recession or not doesn’t even matter. And I don’t mean that in a way that it doesn’t impact people. It does, but because it’s so vague, it’s like whether or not a bunch of academics decide to call it a recession or not, doesn’t matter. What actually matters is like what Henry said, how people are behaving, how people feel about the economy. And I think that’s the only thing we can analyze. And whether they call it a recession or not, maybe it does have some impact, but I don’t think it’s the major impact.

Kathy:
I was just going to say, depending on who you are, if you’re a mother or a father and you have grown kids and they move back in because they can’t get a job, you’re going to feel that recession, I think.

Dave:
But I guess my point is that whether you call it a recession, if the kids can’t find a job, they’re moving back in with you, right? So it’s really about the labor market. It’s not about the nomenclature of whether it’s a recession or not,

Kathy:
It’s just everybody feels it individually. We have a huge amount of real estate agents and people in the real estate industry who have been in a recession, they have been feeling the pain for a few years, but then you’ve got other industries that are growing. So there’s always some kind of recession out there. And like I said, when I was born and raised in the San Francisco Bay area, and in 2000 I think it was one we had the tech recession, it was pretty massive, but other parts of the country weren’t really feeling it. So whether the federal government says it is or it isn’t either in it or you’re not. So you’ve got to be able to pivot and figure out how am I going to get around this? How am I going to create income for my family so I don’t have to move in with mom and dad, which at these days, mom and dad really don’t mind too much. I wouldn’t mind at all having my kids move in. But that is a really good indicator if kids aren’t able to launch, if young adults aren’t able to get out and get their own place form those households, buy those new properties. And that has been an issue.

Henry:
And just to clarify, I think Dave said it too, but I just want to make sure that I’m clear. I’m not saying I don’t care about a recession. I understand that it negatively impacts people, it negatively impacts my business as well. What I’m saying is people don’t generally care, they just care about how their dollar can go, how far their dollar can go. And I bet if you polled the majority of America and asked the question, do you feel like we’re in a recession? I bet the resounding majority would say yes because that’s what it feels like to me. And so I think that that’s the point I was trying to make. And I was listening to a story on the way over here about teenagers and specifically teenagers who are coming of age to be able to drive and get their driver’s license that between the ages of 16 and 18, there are drastically less teenagers that are wanting to get their driver’s or rushing to get their driver’s license because of how much money cars costs, how much gas costs, how much insurance costs that they would much rather just get rides from their friends or their parents.
And so they’re seeing this big decline in teenagers trying to get their driver’s license. And I think that that speaks to exactly what we’re talking about because when I was 16, I was like, take me to the DMV as soon as it opens, I

Dave:
Would’ve robbed a bank to get a car to drive out of my family’s house when I was 16. That’s wild. But we didn’t have Uber. We didn’t have the same options. If you’re stuck in suburbia, it was just the minute you could get a driver’s license. But I totally agree with you, Henry. Yeah, it’s like people don’t care about the word recession. They care if they think if they’re negatively impact. And Jennifer, our producer, actually pulled a stat for us that said CNBC did a survey and said that, you’re right, Henry, 59% of Americans think the US is in a recession right now. And that’s really important because that drives consumer sentiment, which drives consumer spending, which impacts GDP. These things really do matter. What people’s opinions are about the economy really do matter. I agree with your sentiment entirely, Henry, that how far your dollar goes really matters.
And when I was thinking about this before the show, I think if I had to pick just one data point for whether we’re in a recession, I would choose something called real wages, which if you haven’t heard that, it’s basically whether or not your income is growing above or below the rate of inflation. So you would say that you have positive real income growth when let’s just say your salary goes up 5% and inflation that year is 3% because your spending power actually went up during that time. And even though things were getting more expensive, your income was outpacing that. That’s actually not happening right now, but it was happening for years. And I do feel like that is why people feel like we were in a recession, because even if you saw your income go up 5% during a year when inflation hit 9%, that doesn’t matter. It’s not good enough. It doesn’t hold up. And even though that has switched, it’s very modest and I don’t feel like we’ve gotten to the point where real wages are growing faster than inflation for long enough where people feel like they’ve made enough progress against all of the backsliding that happened in 20 21, 20 22, and part of 2023. So I totally agree. Of course, the economists will look at other things, but for me, that’s the number one thing that tells you what you need to know about the economy.

Kathy:
That’s a huge thing. And I saw kind of a funny meme, and I’ll share it, that right now you’re seeing headlines that inflation’s under control and it’s getting close to that 2%. And you’ve got people in the comments, what I don’t see a lowering of inflation. And so this meme basically was saying, well, just imagine if you gained two pounds in 2020 and then you gained nine pounds in 2021 and then you gained eight pounds in 20. And so anyway, now you’re only gaining two pounds a year. That’s kind of where people are at is we didn’t go back and it’s just growing a little bit less fast. People, if their wages, like you said, haven’t gone up more than that, then they’re not doing better. They’re not doing better. And that is the case over time. When you average it out, there has been wage growth, but given the massive amount of inflation they’re behind, they’re down, and everything else has gone up so much in cost, you’re going to have to cut back. And that feels like a recession

Dave:
For sure. And just so people know, Kathy’s a hundred percent right, when you talk about inflation coming down, that is what an economist would call disinflation, which basically means the slowing of the inflation rate. There’s a whole other thing called deflation, which is when prices actually start to go down, which is not what’s happening. And although this is surprising, that is not what most economists believe is healthy for the economy. If you’re curious, deflation poses a lot of risk because it negatively incentivizes spending. Just as an example, if you thought prices were going to go down every month for the next couple of months, you’d probably wait to buy a car or a house or a TV or whatever it is because you’re just waiting and waiting because prices keep dropping. And that actually, by most economists estimation is more damaging to an economy than one to 2% inflation, which is why the Federal Reserve and pretty much every advanced economy targets a very little percent of inflation because it incentivizes people to spend and to grow the economy. Time for one last short break, but stick around. We’ll be right back.
Welcome back investors. Before we get back to the conversation, if you’re enjoying this discussion, a quick reminder that the BiggerPockets blog team works with smart writers to break down issues like this too. So head to biggerpockets.com/blog or subscribe to our newsletter. So you get all those insights each and every week. Now back to the show. Alright, let’s switch this conversation now to what would you do if we were in a recession a little bit more tactical from a real estate investing perspective? Henry, you say that you want to know what’s happening and people spending their dollar, what’s their behavior if you all of a sudden start to see a shift in behavior, let’s just say people start spending money, we start to see delinquencies go up on mortgages or delinquencies on rent. How would you adjust your business accordingly? It depends

Henry:
On what we’re seeing in the market, right? So if we are in a recession and we start to see that values on homes are coming down even slightly, that is going to trigger me in my business to pull the ripcord on the parachute. And that means I’m going to be looking at properties that I am leveraged in a little more than I would normally be looking to unload those properties to de-risk myself and my portfolio on some of those things. Because as investors get more comfortable with what they’re doing, they can and sometimes choose to take on a little more risk in some projects because the reward can be great in higher risk projects. And so I would be looking to unload some of those higher risk projects because remember, I am always buying value first. I’m typically buying at more of a discount than what a real estate crash would yield, meaning that if real estate crashes we’re probably talking somewhere between 15 and 25% reduction in price, I’m typically buying at a 30% discount.
And so that gives me room. And so I would probably look to unload anything that’s higher risk and then pay attention to what rents are doing in order to make a decision on if I need to sell the things that I’m planning on flipping or if I need to continue to flip them depending on how fast values are coming down. So it would just trigger me to look at my portfolio, eliminate the risk, and see if keeping or selling what we are currently working on makes the most sense. But my safety net has and will always be to buy value, to buy at a greater discount than what a real estate crash would typically yield to protect myself. That’s

Dave:
Very good advice. Kathy, what about you?

Kathy:
I look at it kind of like driving a stick shift where there’s a few levers you have to pay attention to, so it’s not too bumpy. One for sure is supply and demand, because again, I’m in the more long-term, buy and hold real estate versus flip. So one of the probably most important things is to look at supply and demand. Is there a lot of new supply coming online or is it possible that there’s going to be a lot of job losses in the area and a recession, so to speak in that particular market? Then that could really affect my rents. Now a property will almost always rent. You just might have to adjust it and lower that rent. So always paying attention to permits, new starts in your area, job growth, is the job growth keeping up with those new permits or is there job losses that’s really going to affect it?
So these are the things I pay attention to. And then another really big lever that I look at is what is happening with the money supply and how is it being distributed? One thing we know is that our government, and this is bipartisan because both sides do it. Our government is very addicted to spending money, and we cannot collect enough tax money to cover all of the things that we want as a nation. So as a result, we’ve found this really easy lever to just make more money, and people seem to think that that’s not going to have an impact, and it does. The impact is inflation and it often ends up in assets. So if we’re looking at a situation where there’s like right now, massively high debt in the government, the only thing they can do is print more money. So that means probably my asset values are going to go up. If we saw the difference where they’re like, okay, nope, we’re not doing this anymore. We’re going to just really shrink the money supply, then I’d be concerned, but I don’t think they’re going to do that. I don’t think they know how to do that.

Dave:
It is a little bit down from 20 21, 20 22, just to be clear, but it’s still way, way, way higher than it was in 2019.

Kathy:
What I have seen over the past decade, well really 14 years, is run runaway money creation, just trillions of dollars of money printing. This was unthinkable before 2008. If you’ve printed a few billion, you got in trouble as a politician. Today we’re talking trillions and it’s just become normal. What’s the word after trillion? I don’t even know, but maybe that’s going to become the next word. I

Dave:
Literally don’t know. Yeah. But yeah, just as a record, before 2008, the total, it’s called M two is the way they measure it. Monetary supply was about $8 trillion right now. It peaked out in 2022 at $21.7 trillion. Now we’re down at a measly $21 trillion. This is

Kathy:
Huge. You’re talking almost triple.

Dave:
Yeah, exactly. Yeah. So it is way, way, way up. So yeah, that’s a very good point. The one thing I will add is I would just from an operational standpoint in my business, is to be very careful and conscious about rent increases, especially if you go into a recession, of course, don’t want to put anyone in a bad situation and sort of go to the max. I can charge when people are struggling. And also just from a business perspective, it doesn’t really make sense because a lot of times in recessions, it’s harder to replace a tenant, and so you’re really better off. It’s better for everyone if you kind of just keep good tenants in place. And I think that’s true in most environments, but I think it’s particularly true if you go into a recession and update the number after trillion, according to Jennifer, our producer who might be a bigger nerd than me is quadrillion. I did not know that. I feel

Kathy:
Better that you didn’t know.

Dave:
She might even be wrong. I have no idea.

Kathy:
But really, I’m old enough to know that the word trillion was not something people knew. They didn’t know what came after a billion. So it could be that in 10 years we’re talking quadrillion. It’s terrifying. But we get a lot of flack that sometimes I see in the notes, the comments, oh, these greedy real estate investors, but I’m telling you, we are doing this. We don’t have to do this, Henry, you don’t have to do this, Dave, you don’t have to do this. We are trying to educate people that it’s not going to get better. Prices aren’t coming down, and you will get left behind if you don’t learn how to become a real estate investor. I’m telling you, you can complain about it or you can do something about it. And there are people within this community at BiggerPockets who have figured it out with no money, but just education and some sweat equity. You get out there and you do it. So don’t complain about real estate investors because we’re going to keep doing what we’re doing because rental properties are needed and flips are needed. You can either join it or be watching prices go up and things getting worse for you. That’s my preach today.

Dave:
Alright, well we are winding down now. That’s a good preach to end on, Kathy. Thank you. So now I’m going to just ask you both quick answers, yes or no. First, Kathy, are we in a recession right now?

Kathy:
I don’t believe we’re in a recession right now.

Dave:
No. Will we be in a recession at any point in the next 12 months?

Kathy:
It depends a lot on what the fed’s about to do. They’re talking about cutting rates in September, and if they don’t then yeah, we’ll probably be in a recession if they do just a little bit only, only one time. Yeah, we’ll probably be in a recession. Other countries have figured it out and they’ve already cut their rates we’re the last to the party, so hopefully they’re not as Logan Moe says, too old and slow. Hopefully they get on it. Alright,

Dave:
So we got Noah and no from Kathy Henry. What do you say? Are we in a recession right now? No. And will we be in the next 12 months? Nope. All right. Yeah, election year, not going to happen. That’s sort of what I’m thinking too. There

Kathy:
Is that

Dave:
Too. I don’t think we are seeing, I think there’s a better case to be made that we were in a recession like in 2022. Honestly, when GDP did decline two consecutive quarters and inflation was so high and real wage growth was negative. But I think now, even though sentiment is negative, we’re at least in a wage growth and inflation standpoint in a much better spot. I do think it’s risky, but I think we will probably narrowly avoid a recession and not see negative GDP growth, at least maybe I’m being overly optimistic, but I do think, as Kathy and Henry said, if they cut rates, it’s going to send a very strong signal to the business and investing community, and I think we’ll start to see money start to move a bit again, and that will improve the labor market and we’ll maybe avoid a recession. If you’re watching on YouTube, make sure to let us know in the comments or you can hit us up, any of us on biggerpockets.com or on Instagram, we’ll put links to our handles below. Henry, thanks for being here, man. Thank you for having me, Kathy, as always, it’s a pleasure.

Kathy:
So fun. Can’t wait to see you guys in a month at BP Con. I don’t know if there’s still tickets, but man, if there are, you guys got to go. Got to go.

Dave:
It’s going to be very fun. I can’t believe it’s in Mexico. I’m so ready to go. Yeah, talk about real estate. Sure, but mostly eat guacamole and drink pina coladas. But yes, the networking and real estate will also be wonderful. Alright, thank you all so much for listening to this episode of On The Market for BiggerPockets. I’m Dave Meyer. I’ll see you next time. On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.