Is the U.S. Already in a Recession? An MBA Application Opportunity

At BSchools, our audience cares a lot about business news, in part because they understand economics so well. Many MBA and specialized business master’s degree candidates graduated with undergraduate economics degrees, and applicants to most graduate management programs need good grades in an undergraduate economics principles course along with coursework in economic statistics to win entry. But a couple of other compelling reasons also drive interest in economics among our readership.

For one thing, applications to MBA and graduate business degree programs surge each time the economy falters—a relationship we’ve probably written about in more than a dozen of our BSchools reports since we launched our platform in 2018. This effect happens because some employees unexpectedly lose their jobs, while others fearing unemployment find their career prospects and chances for better pay stalled. Everybody then looks to MBA and specialized business master’s programs as safe harbors that help them ride out the downturn.

Second, MBA students interviewing for internships and jobs pay close attention to economic conditions because adapting to the latest news can help them win better offers upon graduation. Our BSchools reports are full of examples where MBA job candidates switched their career objectives and started interviewing in new industries once they realized that hiring in their originally planned sectors had started to diminish.

But there’s also a third reason that’s the subject of this report: from the date they decide to seek a two-year MBA all the way to graduation day, those seeking degrees from elite, top-25 business schools need to plan on a tremendous span of lead time. It’s not unusual for the most competitive candidates applying to top programs like the Harvard Business School to plan on 18 months to two years for their “MBA applications journey,” and it’s not difficult to understand why.

Certain aspects of any MBA application campaign can be extremely challenging to conduct effectively under time pressure. Classic examples include GMAT or GRE preparation, business school campus visits, application essay writing, and managing recommenders. Lead time is a critical resource because most applicants to MBA programs underestimate the time required for each school’s application and typically run out of time while trying to meet all their application deadlines for as many as four or even five schools.

Now, if we at BSchools could alert our audience of an impending economic downturn sooner, our readers could put that intelligence to a tremendous advantage against competing applicants. It would mean that our readers could commit to seeking an MBA or a specialized business master’s degree earlier than they might otherwise, and start their application journeys sooner. The extra lead time would help them file better applications, meaning that in many cases they’d win entry at better-ranked schools.

And because employers with the best opportunities tend to restrict their jobs to graduates of top-ranked programs, those applicants would receive better offers upon graduation. Other things equal, one would expect those advantages would contribute to better-paying jobs and better career opportunities over the ensuing decades.

In short, awareness of an impending recession provides critical intelligence that all potential MBA applicants need to know about as soon as possible. Arguably, the success of an MBA applicant’s campaign can often turn on that crucial early awareness.

However, the problem is that economists are terrible when it comes to predicting when a recession will likely start. Moreover, they’re not much better at promptly identifying the precise first month of a recession when the business cycle had peaked and economic activity started to contract. Examine every one of the recessions dating back as far as the 1980 and 1981 double-dip Reagan-era recessions, and one will observe that macroeconomists were unable to accurately characterize downturns as recessions until as long as one full year after those recessions had actually started.

Fortunately, new research suggests this situation will soon change. Potential MBA applicants who understand the latest research into recession forecasting and who take steps promptly should be able to capitalize on the potentially transformative, life-changing opportunities this new research will unlock.

Rethinking Recession Forecasting

In October 2021 two economics professors published new research demonstrating that consumer expectation indexes—a type of survey research—predict American recessions better than traditional quantitative macroeconomic tools. The scholars show how downward trends in consumer expectations can accurately predict recessions as long as 18 months in advance.

What’s more, their thesis is relatively straightforward and its support doesn’t depend upon complex modeling or extensive data sets with large numbers of independent variables.

Dr. David Blanchflower of Dartmouth College and Dr. Alex Bryson with University College London released their findings in a new working paper from the U.S. National Bureau of Economic Research (NBER). Dr. Blanchflower has more than 40 years of experience specializing in labor economics, and while a policymaker at the Bank of England from 2006 to 2009 set interest rates during the 2008 Great Recession.

The team shows that two famous consumer expectation indexes most of us recognize from press reports are all that researchers need to establish a reliable early-warning system to accurately forecast recessions six to 18 months in the future. One index is a subset of the University of Michigan’s Index of Consumer Sentiment known as the ICS Expectations Index. The other is the Conference Board Expectations Index, a component of the board’s Consumer Confidence Survey.

Two of the professors’ findings seem particularly significant. First, declines of at least ten percentage points in these indexes have predicted recessions since the early 1980s with 100 percent accuracy. And second, despite confounding employment and wage statistics that might suggest otherwise, six months of plummeting consumer expectations indicate that America may have already entered another recession late in 2021.

What is a Recession?

Technically, the traditional definition of a recession during the post-World War II era has been two consecutive quarters of negative growth in a nation’s Gross Domestic Product, or GDP. However, that definition has been re-evaluated, and no longer do all authorities subscribe to it.

For example, the Business Cycle Dating Committee of the NBER says a recession encompasses “a significant decline in economic activity spread across the economy and lasts more than a few months.” What this newer definition means is that the quarters no longer need be consecutive, as with the 2001 Dot-Com Crash, and that the recession no longer has to last two complete quarters, as with the brief but severe Covid recession during the first half of 2020.

The following table summarizes the recessions since 1980 identified by the NBER:

Start Date Quarters Affected
January 1980 Q2 to Q3
July 1981 1981 Q4 to 1982 Q1
July 1990 1990 Q4 to 1991 Q1
March 2001 Q1 to Q3
December 2007 2007 Q4 to 2009 Q2
February 2020 Q1 to Q2

In each of these six instances, the NBER required between five and 12 months to declare each recession. The slowest example is the most extreme failure, in the sense that it took the NBER a full 12 months to declare the start of the 2008 Great Recession when it at last announced to nobody’s surprise in December 2008 that this recession kicked off back in December 2007.

Yet Dr. Blanchflower and Dr. Bryson show in their paper that analysis of consumer expectations would have accurately forecasted these six recessions at least 12 months before the NBER finally made its call in each case.

Has the United States Entered Another Recession?

So let’s “cut to the chase” and address the question everyone cares about: is another recession imminent or already underway?

If so, such a bold conclusion would run contrary to the opinions of most economists at Wall Street banks and major research universities. And it would certainly differ from the opinions of the economists at the Federal Reserve, which in March and May 2022 raised interest rates in a bid to cool off inflation—something they never would have done if they believed a significant probability exists that the nation may have already entered a recession.

But bucking this trend doesn’t seem to phase Professor Blanchflower, who claims that’s what one would expect. He points out that during the past half-century, such institutional and academic economists have tended to be overly optimistic going into recessions and overly pessimistic even after recoveries were clearly and demonstrably underway.

He also points out that the data, as depicted in the following table, doesn’t lie. The table’s left column presents the NBER-assigned starting date of every recession called by the Bureau since 1980. To the right, we see the dated peak index values for both consumer expectations indexes from the Conference Board and the University of Michigan prior to the recession start date in the left column. We also observe the decrease in each index’s value from the peak to the value during the month the recession started:

Recession Conference Board University of Michigan
Peak Drop Peak Drop
January 1980 97.7 (Oct-78) 26.3 1.7 (Oct-78) 17.6
July 1981 102.9 (Nov-80) 8.8 76.9 (Nov-80) 6.1
July 1990 108.3 (Feb-89) 16.5 89.9 (Jan-89) 13.3
March 2001 119.1 (Jan-00) 36.0 87.6 (Jan-00) 22.0
December 2007 94.4 (Jul-07) 20.5 87.6 (Jan-07) 21.4
February 2020 108.1 (Feb-20) 21.3 92.1 (Feb-20) 21.3
September 2021 111.9 (Mar-21) 25.3 83.5 (Jun-21) 18.4

Note how in every case the expectations index peaks long before the start of each recession. In fact, in every case except the second of the Reagan double-dip recessions in July 1981, the index value drop is massive—approximately 20 points below the peak. And even in the 1981 instances, the declines are significant.

Notice also the bottom line. No, the NBER hasn’t yet declared that another recession started in September 2021. However, because the most recent data so closely fits the 42-year pattern, Dr. Blanchflower and Dr. Bryson argue that the United States is now in another recession, and have called the start date the end of September 2021.

More Support: State Data and Multiple Regressions

The team also provides monthly expectations data from the Conference Board starting in 2007 for the eight largest states by population: California, Texas, Florida, New York, Pennsylvania, Illinois, Ohio, and Michigan. The same relationship apparent in the 42-year national trend holds among these states during the Great Recession, in that the monthly expectation scores drop from their peaks in all states early in 2007 before bottoming out later that year.

The latest 2021 state data shows an identical pattern, where the monthly expectation scores peak in the spring and then crash during the fall. They all reach peaks during the first four months of the year and then decline by substantial amounts. Some of these plummets are profound: 59 points in New York, 40 in Pennsylvania, 35 in California, and 31 in Illinois.

If all this data didn’t provide enough support for their thesis, the team then performs multiple regression analyses using data from 2007 to 2021. These results demonstrate that six-month, 12-month and 18-month lagged expectations data all predict changes in the unemployment rates. The correlations are highly statistically significant, with R-squared determination coefficients all above 50 percent—and those values are about double what’s typically considered very good in multiple regression analyses in the social sciences.

Other Economists Concur

Dr. Blanchflower and Dr. Bryson are hardly the only economists who believe that a recession is underway or imminent. Another is David Rosenberg, who for ten years worked as the chief economist at Merrill Lynch’s headquarters in New York before leaving to start his Toronto-based company which today serves 2,600 clients in 40 nations.

Rosenberg gained respect over the past 23 years because he was so early at forecasting the 2001 Dot-Com Crash and the 2008 Great Recession, but he resisted pressure from his bosses at Merrill to issue less accurate, more optimistic predictions.

“Most economists on Wall Street like to play it safe because that ensures your job longevity,” Rosenberg told the New York Times. “That’s why I started my own firm. My goal is not to make my clients happy. If it were, I would have started Rosenberg Circus instead of Rosenberg Research.”

This time around, Rosenberg expects a recession is again on the way this year in the United States. In fact, he told Business Insider his team of economists believes a whopping 75 percent probability exists of a 2022 recession. He says that several factors are propelling that downturn, including the withdrawal of catalysts propping up the economy, such as easy access to credit financing, the unprecedented Covid fiscal stimulus relief payments, and increased demand from the economic reopening.

“Nobody has a clue what the economy or the market’s going to look like once those training wheels are taken off the bicycle,” Rosenberg told Insider.

However, initially he says the recession will develop because the Fed will go too far in fighting inflation—which as we recently pointed out in BSchools has reached a four-decade high. Rosenberg says that the financial markets have already “priced in” expectations for up to five interest rate hikes within the next 12 months.

Indeed, the Fed’s FOMC (Federal Open Market Committee) released projections along with their interest rate hike press release for such rates rising to 1.75 percent by the end of 2022 and as high as 2.75 percent by the end of the following year. Making borrowing more expensive could kill off demand within the economy for everything from car and home loans to corporate bonds.

But when the Fed’s chairman Jerome Powell in recent congressional testimony lauded one of his predecessors Paul Volcker as “the greatest economic public servant of the era,” Rosenberg said he felt alarmed. That’s because Volcker so unexpectedly and aggressively boosted interest rates to whip inflation that he slammed a hot economy going 65 MPH into reverse gear. Sure, Volcker killed off inflation, but he also produced two virulent double-dip recessions starting in January 1980 that lasted for almost two-and-a-half miserable, depressing years.

“People tend to forget that in the early 1980s Volcker was reviled,” Rosenberg told the Times. Actually, that’s an understatement. New college graduates especially hated Volcker because tens of millions of them awarded bachelor’s degrees in the early-to-mid 1980s found that the era’s high unemployment blocked them from launching their professional careers until years later.

The luckier ones eventually found refuge in overflowing graduate school programs studying for degrees like MBAs, but the financial damage left lasting emotional scars on that generation of college graduates for years to come.

Danger and Opportunity

Make no mistake about it: as Volcker’s effect on America’s college graduates demonstrates, recessions can be dangerous. That’s why it’s so important to pay attention to the macroeconomic forecasts of astute economists like those we profiled for this report.

But that grave danger can also accompany great opportunity. And an outstanding way to exploit that opportunity is by taking steps without delay to explore the transformative, life-changing benefits of MBA programs and related graduate management education alternatives like those we profile here at BSchools.

Douglas Mark
Douglas Mark

While a partner in a San Francisco marketing and design firm, for over 20 years Douglas Mark wrote online and print content for the world’s biggest brands, including United Airlines, Union Bank, Ziff Davis, Sebastiani, and AT&T. Since his first magazine article appeared in MacUser in 1995, he’s also written on finance and graduate business education in addition to mobile online devices, apps, and technology. Doug graduated in the top 1 percent of his class with a business administration degree from the University of Illinois and studied computer science at Stanford University.

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