Has the U.S. Recession Already Happened? Insights from PCE and Housing Investment Trends

This report explores the significant implications of Personal Consumption Expenditures (PCE) and housing investment on the U.S. economy. By analyzing recent data, we assert that the U.S. recession likely occurred last year, with current economic indicators pointing towards stabilization rather than a continued downturn.

Personal Consumption Expenditures (PCE): The Backbone of U.S. Economic Growth

PCE is a fundamental component of the U.S. economy, representing approximately 70% of GDP. Within PCE, services account for a substantial portion, highlighting the economy's reliance on consumer spending. The importance of PCE cannot be overstated, as it serves as a primary driver of economic activity and a stabilizer during economic fluctuations.

Income and Consumption Relationship

Employee compensation plays a crucial role in sustaining PCE. As of April 2024, employee compensation growth has slowed to 5.6%, driven by both employment levels and average hourly wages. This deceleration marks a return to pre-pandemic growth rates, indicating a normalization rather than an economic crisis. Given that income is a major determinant of consumption, the current trend suggests that the U.S. economy is stabilizing after the sharp recovery phase following the pandemic-induced downturn.

Housing Investment: A Key Indicator of Economic Sensitivity to Interest Rates

Housing investment is another critical indicator of economic health, particularly sensitive to interest rate changes. The U.S. housing market experienced a significant downturn as interest rates rose, which impacted both new and existing home sales. However, recent data indicates a stabilization in housing investment, which had been contracting over the past year.

Historical Context and Current Trends

Historically, a decline in housing investment often precedes broader economic slowdowns. The recent recovery in housing investment, with three consecutive quarters of positive growth, suggests that the U.S. economy has already weathered the worst of its downturn. This aligns with the broader economic narrative that the recession likely occurred last year, as the housing sector begins to rebound.

Economic Implications

Historically, a slowdown in consumption growth combined with a significant decline in housing investment is a hallmark of a "hard landing" for the U.S. economy. In eight historical recessions associated with Federal Reserve rate hikes, real GDP typically contracted by an average of 1.7% annually. Private fixed investment usually contributed 1.6 percentage points to this decline, while consumption maintained a marginal positive contribution of 0.1 percentage points. Notably, it is only during severe recessions, such as the Great Recession or periods of significant stagflation, that consumption experiences negative growth.

The combination of stabilizing PCE and recovering housing investment points to an economy that has already adjusted to previous shocks. The U.S. labor market, while showing signs of slack, continues to support consumer spending through steady income growth. Additionally, the recovery in housing investment indicates resilience in the face of higher interest rates.

Federal Reserve Policy Outlook

Given these trends, the Federal Reserve is likely to maintain a cautious approach to monetary policy. The stabilization in key economic indicators supports a scenario where the Fed can afford to delay further rate cuts until there is more definitive evidence of sustained economic growth and controlled inflation.

Conclusion

The U.S. economy appears to have experienced its recession last year, with current indicators such as PCE and housing investment suggesting a phase of stabilization. As the economy continues to recover, it is crucial for investors to monitor these indicators and Federal Reserve policies to navigate the evolving landscape effectively.