Russia’s invasion of Ukraine has exacerbated global food and energy prices. Extreme lockdowns in China over COVID-19 are worsening supply shortages.

Inflation is at a 40-year high. Stock prices are sinking. The Federal Reserve is making borrowing much costlier. And the economy actually shrank in the first three months of this year. Is the United States at risk of enduring another recession, just two years after emerging from the last one?

For now, even the more pessimistic economists don’t expect a downturn anytime soon. Despite the inflation squeeze, consumers — the primary driver of the economy — are still spending at a healthy pace.

Businesses are investing in equipment and software, reflecting a positive outlook. And the job market is more robust than it’s been in years, with hiring strong, layoffs way down and many employers desperate for more workers.

In the United States, the private National Bureau of Economic Research (NBER), which maintains a chronology of the beginning and ending dates of US recessions, uses a broader definition and considers a number of measures of activity to determine the dates of recessions.

The NBER’s Business Cycle Dating Committee defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.

A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.” Consistent with this definition, the Committee focuses on a comprehensive set of measures—including not only GDP, but also employment, income, sales, and industrial production—to analyze the trends in economic activity.

Although an economy can show signs of weakening months before a recession begins, the process of determining whether a country is in a true recession often takes time.

For example, it took the NBER committee a year to announce the beginning and end dates of the most recent US recession. This is understandable. The decision process involves establishing a broad decline in economic activity over an extended period of time, after compiling and sifting through many variables, which are often subject to revisions after their initial announcement.

In addition, different measures of activity may exhibit conflicting behavior, making it difficult to identify whether the country is indeed suffering from a broad-based decline in economic activity.

On Wednesday, oil prices jumped 5% after Russia sanctioned 31 companies based in countries that imposed sanctions on Moscow after the Ukraine invasion.

That created unease in the market at the same time that Russian natural gas flows to Europe via Ukraine fell by a quarter. It was the first time exports via Ukraine have been disrupted since the invasion.

Price gains have been limited by worries about demand destruction in China, as it attempts to curb the spread of the coronavirus.

The overall US equity market has been battered this year in part by investors’ fears that the world’s largest economy will fall into recession as the Federal Reserve quickly raises borrowing costs to tame decades-high inflation.

The economy, which had been recovering from the COVID-induced blow, contracted by 1.4% in the first quarter of 2022 from the fourth quarter of 2021.

Small-caps have declined by 36% on average during recessions, but with the Russell 2000 already down by almost 30% from its peak, investors have priced in a nearly 80% chance of recession, the bank said.

The stock selloffs have resulted in lower valuations, with large caps trading at their weakest levels since the coronavirus outbreak began to spread, while small caps were trading below COVID levels and were the cheapest since 2011.

The Russell 2000 forward price-to-earnings ratio has fallen to 12.5x from 14.2x, and the large cap Russell 1000 index P/E has declined to 17.6x from 19.5x.

The price of gasoline in the U.S. hit an all-time high on Tuesday as the national average spiked $0.17/gallon from last week to $4.37/gallon, topping the previous all-time high set March 8.

The European Union’s discussion of pulling back from buying Russian oil has sent additional shock waves through an already strained oil market, with the imbalance between supply and demand likely to get worse as more countries follow the U.S. in banning Russian oil. In sharp contrast, the crude markets have been incredibly volatile and full of wild gyrations.

So far, energy investors have been largely spared from the broader equity market selloff, with the sector emerging as the best performer amongst the 11 U.S. market sectors.  But the bulls recently faced their first major scare in months. 

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