Key takeaways
The economy is not a monolith – different parts of the economy have slightly different cycles. When one sector is up, another one may be down. And when there's a sustained and generalized drop in economic activity, that's what we usually call a recession. But did part of the economy have one already?
Two big changes hit the economy in 2022. One was rising interest rates, with the Federal Reserve raising its target for the federal funds rate by more than four percentage points. The other was a swing of households' spending into services consumed outside the home rather than goods consumed inside the home.
Each of these changes affected a different part of the economy. Higher short-term interest rates pushed up mortgage rates as well, depressing demand and making new housing harder to finance. As a result, the number of new houses being built in the United States cratered:
Dips in housing starts don't always correspond to recessions across the economy, but – putting aside the onset of the Covid-19 pandemic – there hasn't been a drop this steep since the period immediately before the Great Recession.
Higher short-term interest rates have pushed up credit card rates, too, which can put a drag on retailers' sales. In fact, retailers felt a double-whammy in 2022 because of the shift in consumers' spending to services. Accounting for seasonality and inflation, retail sales have been falling since the spring:
This is notable, because retail sales measured this way have only tended to fall just before or during recessions. Yet a general recession may still be several months away, if it arrives at all. As in new housing starts, what happened in retail may be more specific to the sector.
So will the economy as a whole actually enter a recession? One fairly reliable leading indicator is employment in "temporary help services," which has also been falling since the summer. It even fell in absolute terms – not just with seasonal adjustments – in November and December.
Temporary help doesn't tell the entire story, though. Flexible workers on our platform, many of whom are on our business partners' rosters and on long-term assignments, have actually seen their hours per month grow. In retail, our platform experienced a huge surge of activity during the last two months of 2022. So while businesses may be trimming workers with whom they had marginal relationships, they appear to be doubling down on flexible workers, especially the ones to whom they're more committed.
And it's pretty clear that a general recession hasn't happened yet. This morning, the Bureau of Economic Analysis released its advance estimate of economic growth for the fourth quarter of 2022, showing a fairly strong expansion of 2.9% at an annual rate. But there are still caveats: a large part of this growth came from government spending and the buildup of inventories by businesses, while spending by consumers rose by only 2% – about half its average growth rate from 2010 to 2019.
In addition, the ratio of employed people to the population fell in October and November. It was the first decline in consecutive months since the beginning of the pandemic. Most sustained declines in the ratio happen during recessions; in fact, they're basically part of the definition of a recession. If this wasn't a mini-recession, at least some parts of the economy seemed to be catching their breath.
The question now is whether housing and retail trade will recover. Interest rates are unlikely to rise much further, and the shift in consumers' spending toward services may have been a one-time thing. Weakness elsewhere in the economy could make things worse in these sectors, but the strongest effects of these big changes have probably passed. At least in housing, there are already positive signs.
In the meantime, it will be interesting to see if flexible workers continue to buck the trend followed by temporary help services. Flexible workers are increasingly becoming a core component of businesses' payrolls, as even permanent employees lobby for flexible schedules. If they help businesses to ride out this idiosyncratic economic cycle, then their role in the labor market could become even more central.
Realtime metrics
These metrics, derived from data aggregated across the Instawork platform, compare the two weeks starting 1/12/2023 to the previous two weeks. To control for the overall growth of the Instawork marketplace, only shifts involving businesses that booked shifts in both periods are included:
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