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Guest Contribution: “Flashing signs of recession”

Today, we are pleased to present a guest contribution written by Filippo Natoli and Fabrizio Venditti of the Directorate General for Economics, Statistics…



Today, we are pleased to present a guest contribution written by Filippo Natoli and Fabrizio Venditti of the Directorate General for Economics, Statistics and Research of the Bank of Italy. The views presented in this note represent those of the author and not necessarily reflect those of the Bank of Italy.

A negative reading for the advance estimate of US GDP growth in q2 surprised private forecasters, contributing to recession talks. By using a standard forecasting model, we show that, when accounting for the high level of CPI inflation and tight labor markets, an incoming recession appeared to be extremely likely even one month ago, both in the United States and the United Kingdom.

The second quarter of 2022 has witnessed a sharp deterioration in the global business cycle momentum as global trade remains stifled by persistent supply bottlenecks, commodity prices are bolstered by the war in Ukraine and high inflation keeps eroding consumer purchasing power. Meanwhile financial conditions have tightened considerably, as central banks reacted aggressively to stubborn inflationary pressures. Against this backdrop, the US economy has recorded a second consecutive negative GDP print, after the fall of economic activity in Q1. The prospects for other advanced economies appear equally worrisome, especially for energy importers, whose terms of trade have rapidly deteriorated following the invasion of Ukraine. Forecasters have factored in these headwinds and have marked down their expectations for global growth in 2022 and 2023 (see, e.g., IMF) and the question seems to be when rather than if a recession is going to occur: the search of the word “recession” on Google has flared up since last March (Figure 1).


Figure 1: Google search intensity of the word “recession”

(number of hits ranked between 0 and 100 over the considered period). Source: Google trends


In recent work (Natoli and Venditti, 2022), we contribute to this debate by jointly evaluating the relevance of financial and macroeconomic factors in anticipating recessions in the United States and in the United Kingdom since the late 1990s. In our analysis we rely on the standard probit forecasting framework pioneered by Estrella and Hardouvelis (1991),

where the dependent variable is a dummy equal to one (zero) if the economy is (is not) in a recession at time t + h, h is the forecast horizon, x is the set of regressors, F(.) is the standard normal cumulative distribution function and  is a normally distributed error.

The standard specification in the literature, which we take as a baseline, considers the slope of the government bond yield curve – the difference between the 10-year vs. 3-month yield – as a unique predictor. The ability of this minimalistic model to predict recessions, however, has been recently questioned in the literature (Karnizova and Li, 2014; Ercolani and Natoli, 2020; Kiley, 2022, among others). We therefore start by adding to the baseline specification indicators of market stress – financial conditions and stock market volatility, according to the view that the slope of the yield curve alone might be unable to fully capture deteriorating financing conditions leading to a crisis.  A Financial Condition Index (FCI) is constructed as an unweighted average of 10-year yields, monthly stock returns and corporate bond yield spreads, in the spirit of Arrigoni et al. (2022), while stock market volatility is captured by the VIX. In a third specification we also add two variables summarizing the macroeconomic environment – CPI inflation and the unemployment rate. Figure 2 shows coefficient estimates for the US over different forecasting horizons (1 to 12). They confirm that financial indicators and macroeconomic conditions provide additional predicting power. In particular they show that periods of (i) flat yield curves (ii) tight financial conditions (iii) high financial market uncertainty (iv) high inflation and (v) low unemployment (broadly resembling the current economic environment) were likely to be followed by a recession. Estimates for the UK are very similar.


Figure 2: Average marginal effects, US model

When specifications based on the slope of the yield curve are enriched by key financial and macroeconomic indicators, forecasting performance improves considerably and, in the current environment, the probability of an incoming recession jumps to values very close to 1. Figure 3 shows the time series of the predicted recession probability (6-month ahead) of the model that relies only on the slope of the yield curve (blue lines), of the intermediate specification that includes the VIX and FCI (green line) and of the full model that also introduces inflation and unemployment (red line). According to standard measures of fit, this last model is the one that performs best. All models are estimated with data going from January 1998 up to May 2022 – i.e., already available around mid-June. It turns out that, historically, financial conditions played a more important role than inflation and unemployment in predicting the recessions of the early 2000s; also, they were very tight before the pandemic shock that eventually toppled the global economy in 2020. In the case of the Great Recession in 2008 both financial and real factors played a role.  At the current juncture, on the other hand, the strongest recession signals are coming from record high inflation and tight labor markets, in line with what is found in Domash and Summers (2022). An interesting observation is that the sample period includes years of anchored inflation expectations and credible monetary policy: our results indicate that, even in such environment, an aggressive monetary response – sufficiently aggressive as to generate a recession – would be needed to tame inflation. All in all, our results indicate that, at the current juncture, a soft landing – engineering disinflation without provoking a recession – is very unlikely. The actual combination of hot labor markets, high inflation and tight financial conditions has been typically followed by a recession.


Figure 3: Recession probabilities six months ahead, time series

Panel A

Panel B

Note: economy-specific recession bands are based on the OECD recession indicators

Source: Natoli, F. and Venditti F. (2022). The role of financial and macroeconomic conditions in forecasting recession (July 29, 2022). Available at SSRN: 4176581


This post written by Filippo Natoli and Fabrizio Venditti. 

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War, peace and security: The pandemic’s impact on women and girls in Nepal and Sri Lanka

The impacts of COVID-19 must be incorporated into women, peace and security planning in order to improve the lives of women and girls in postwar countries…



Nepalese girls rest for observation after receiving the Moderna vaccine for COVID-19 in Kathmandu, Nepal. (AP Photo/Niranjan Shrestha)

Attention to the pandemic’s impacts on women has largely focused on the Global North, ignoring countries like Nepal and Sri Lanka, which continue to deal with prolonged effects of war. While the Nepalese Civil War concluded in 2006 and the Sri Lankan Civil War concluded in 2009, internal conflicts continue.

As scholars of gender and war, our work focuses on the United Nations Security Council Resolution 1325 on women, peace and security. And our recently published paper examines COVID-19’s impacts on women and girls in Nepal and Sri Lanka, looking at policy responses and their repercussions on the women, peace and security agenda.

COVID-19 has disproportionately and negatively impacted women in part because most are the primary family caregivers and the pandemic has increased women’s caring duties.

This pattern is even more pronounced in war-affected countries where the compounding factors of war and the pandemic leave women generally more vulnerable. These nations exist at the margins of the international system and suffer from what the World Bank terms “fragility, conflict and violence.”

Women, labour and gender-based violence

Gendered labour precarity is not new to Nepal or Sri Lanka and the pandemic has only eroded women’s already poor economic prospects.

Prior to COVID-19, Tharshani (pseudonym), a Sri Lankan mother of three and head of her household, was able to make ends meet. But when the pandemic hit, lockdowns prevented Tharshani from selling the chickens she raises for market. She was forced to take loans from her neighbours and her family had to skip meals.

Some 1.7 million women in Sri Lanka work in the informal sector, where no state employment protections exist and not working means no wages. COVID-19 is exacerbating women’s struggles with poverty and forcing them to take on debilitating debts.

Although Sri Lankan men also face increased labour precarity, due to gender discrimination and sexism in the job market, women are forced into the informal sector — the jobs hardest hit by the pandemic.

Two women sit in chairs, wearing face masks
Sri Lankan women chat after getting inoculated against the coronavirus in Colombo, Sri Lanka, in August 2021. (AP Photo/Eranga Jayawardena)

The pandemic has also led to women and girls facing increased gender-based violence.

In Nepal, between March 2020 and June 2021, there was an increase in cases of gender-based violence. Over 1,750 incidents were reported in the media, of which rape and sexual assault represented 82 per cent. Pandemic lockdowns also led to new vulnerabilities for women who sought out quarantine shelters — in Lamkichuha, Nepal, a woman was allegedly gang-raped at a quarantine facility.

Gender-based violence is more prevalent among women and girls of low caste in Nepal and the pandemic has made it worse. The Samata Foundation reported 90 cases of gender-based violence faced by women and girls of low caste within the first six months of the pandemic.

What’s next?

While COVID-19 recovery efforts are generally focused on preparing for future pandemics and economic recovery, the women, peace and security agenda can also address the needs of some of those most marginalized when it comes to COVID-19 recovery.

The women, peace and security agenda promotes women’s participation in peace and security matters with a focus on helping women facing violent conflict. By incorporating women’s perspectives, issues and concerns in the context of COVID-19 recovery, policies and activities can help address issues that disproportionately impact most women in war-affected countries.

These issues are: precarious gendered labor market, a surge in care work, the rising feminization of poverty and increased gender-based violence.

A girl in a face mask stares out a window
The women, peace and security agenda can help address the needs of some of those most marginalized. (AP Photo/Niranjan Shrestha)

Policies could include efforts to create living-wage jobs for women that come with state benefits, emergency funding for women heads of household (so they can avoid taking out predatory loans) and increasing the number of resources (like shelters and legal services) for women experiencing domestic gender-based violence.

The impacts of COVID-19 must be incorporated into women, peace and security planning in order to achieve the agenda’s aims of improving the lives of women and girls in postwar countries like Nepal and Sri Lanka.

Luna KC is a Postdoctoral Researcher at the Research Network-Women Peace Security, McGill University. This project is funded by the Government of Canada Mobilizing Insights in Defence and Security (MINDS) program.

Crystal Whetstone does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Target Sets Sights on Holiday Season, Has Plan for High Inventory

Target said that it still expects spillover from inventory rightsizing to the tune of $200 million in the third quarter.



Target said that it still expects spillover from inventory rightsizing to the tune of $200 million in the third quarter.

Target's  (TGT) - Get Target Corporation Report strategy is paying off as the company's stock falls on heavy volume following its earnings release. 

Normally, a profit miss as wide as Target's, 39 cents per share vs. expectations of 72 cents per share, would result in a bigger drop than Target's, but the retailer has been prepping the market for this miss all summer. 

The inventory the company built up during the height of the pandemic, as Americans shopped more from home, needs to go, and the only way get rid of the excess product is deep discounts. 

"Back in June, we announced that our team would be undertaking a bold effort to rightsize our inventory position in the categories for which demand patterns have radically changed," CEO Brian Cornell said during the company's earnings call. "While this decision had a meaningful short-term impact on our financial results, we strongly believe it was the best path forward."

Now, looking forward the company sees some overhang for the third quarter, but expects a big holiday season ahead. 

While some fear a recession and what it might do to the economy, Target is convinced that the holiday season will be strong.

Image source: John Smith/VIEWpress.

Target Aims for Holiday Season

While Target is focused on the back-to-school season currently underway, the company expects "spillover" from its inventory issues to be present during the third quarter to the tune of $200 million. 

But the company's own checks suggest that its shoppers are excited about the holiday season. 

"The one thing that seems to be very consistent is a guest and consumer who says they want to celebrate the holiday seasons so we certainly expect that they are going to be celebrating Halloween this year and actively trick or treating and hosting parties with friends and family," Cornell said.

"We know they're looking forward to Thanksgiving and they're going to look forward to celebrating the Christmas holidays and that comes down each and every week as we survey consumers and talk to our guests so that gives us great optimism for our ability to perform during these key holiday seasons"

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Not only does Target expect a strong quarter, but the company also expects favorable comps as fourth quarter headwinds from a year ago aren't present this time around. 

"Guests already have their sights set on upcoming holidays and seasonal moments in Q3 and beyond," Cornell said.

Target's Q2 Collapse

Target said adjusted earnings for the three months ending in July were pegged at 39 cents per share, down 89% from the same period last year and well shy of the Street consensus forecast of 72 cents per share.

Group revenues, Target said, rose 3.5% to $26 billion, essentially matching analysts' estimates of a $26.04 billion tally. Target said same-store sales rose 2.6%, again shy of the Refinitiv forecast of 3.2%, while operating margins fell to 1.2%, below the group's July guidance of a 2% level. 

Earlier this summer, Target cautioned that its bigger-than-expected 35% build-up in overall inventories over the first quarter would trigger price cuts, adding that deeper discounts would be needed to shift the excess goods onto a customer base that was already pulling back on discretionary spending.

Walmart  (WMT) - Get Walmart Inc. Report, Target's larger big box rival, said Tuesday that improving spending trends, as well as actions the group has taken to shift excess inventory, will ease some of the pressures it expects to face in terms of overall profits over the back half of the year.

Walmart said adjusted earnings for the three months ended in July came in at $1.77 per share, down one penny from the same period last year but well ahead of the Street consensus forecast of $1.62 per share.

Group revenues, the company said, were tabbed at $152.9 billion, an 8.4% increase from last year that topped analysts' estimates of $150.81 billion. U.S. same-store sales rose 6.5% from last year, the company said, firmly topping the Refinitiv forecast. 

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Why Is No One at Nike Working This Week?

And will the move gain broader acceptance among American employers?



And will the move gain broader acceptance among American employers?

You go into an office, pull at the door and find that it doesn't give and nobody's there. 

It may sound like the start of the common rushing-to-the-office-on-a-Saturday nightmare but, more and more, collective time off is being embraced by employees as part of a push for a better work culture.

While professional social media platform LinkedIn  (MSFT) - Get Microsoft Corporation Report and dating app Bumble  (BMBL) - Get Bumble Inc. Report had already experimented with collective time off for workers, the corporate ripples truly began with Nike  (NKE) - Get Nike Inc. Report.

In August 2021, the activewear giant announced that it was giving the 11,000-plus employees at its Oregon headquarters the week off to "power down" and "destress" from stress brought on by the covid-19 pandemic.

"In a year (or two) unlike any other, taking time for rest and recovery is key to performing well and staying sane," Matt Marrazzos, Nike's senior manager of global marketing science, wrote to employees at the time.

Nike Is On Vacation Right Now

The experiment was, not exactly unexpectedly, very well-received — a year later, the company instituted its second annual "Well-Being Week." Both the corporate headquarters in Beaverton, Ore., and three Air Manufacturing design labs with over 1,500 employees are closed for a collective paid vacation from Aug. 15 to 19.

"We knew it would be impactful, but I was blown away by the feedback from our teammates [...]," Nike's Chief Human Resources Officer Monique Matheson wrote in a LinkedIn post.

"Because everyone was away at the same time, teammates said they could unplug – really unplug, without worrying about what was happening back at the office or getting anxiety about the emails piling up."


Of course, the time off only applies to corporate employees. To keep the stores running and online orders fulfilled but not exacerbate the differences between blue and white collar workers, Nike gave its retail and distribution employees a week's worth of paid days off that they can use as they see fit.

Nike has tied the change to its commitment to prioritize mental health. In the last year, it launched everything from a "marathon of mental health" to a podcast that discusses how exercise can be used to manage anxiety and depression.

Rippling Through the Corporate World?

But as corporations are often criticized for turning mental health into positive PR without actually doing much for employees, the collective week off was perhaps the most significant thing the company did for workers' mental health.

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The practice of set office closures has long been common practice in many European countries. In France, not only corporate offices but even restaurants and retail stores empty out over the month of August for what is culturally considered sacred vacation time. 

But as American work culture prioritizes individual choice and "keeping business going" above all else, the practice has been seen as radical by many corporate heads and particularly small businesses that may find it more difficult to have such a prolonged drop in business. 

But in many ways, the conversations mirror some companies' resistance to remote work despite the fact that one-fourth of white-collar jobs in the U.S. are expected to be fully remote by 2023

"This is the kind of perk that makes employees want to stay," industry analyst Shep Hyken wrote in a comment for RetailWire. "And knowing they can’t completely shut the entire company down, I like the way they are compensating the distribution and retail store employees."

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