The 2026 Recession Is Here

0:00I created a new, better way of tracking recessions in the United States. I told you exactly what would trigger that recession. And now, as of last week, that recession is here. Back in November, I was growing frustrated with the traditional definitions, or really lack of definitions, about what a recession actually is. Because to me, the normal way of using GDP, gross domestic product, it doesn't really reflect the economic experiences of ordinary Americans. which, at least to me, is what actually matters. So I did some research and actually came up with a new definition of recession. And as of last week, by my definition, the U.S.

0:44economy flipped from growing to recession. Yes, it is true, unemployment is still low, GDP is still growing, and many of the headlines say that we're fine. But I stand by my indicator, and I think that we've just crossed an important threshold that could change expectations and outcomes in the economy and in the housing market for months or years to come. So today on the show, we're going to discuss what exactly is this Main Street recession that I've defined, how does it differ from official definitions, where we stand in these indicators today, and what all this means for you and your finances.

1:23This is On The Market. Let's get to it.

1:30Hey everyone, welcome to On the Market. I'm Dave Meyer. I'm the Chief Investment Officer at BiggerPockets. I'm also an economic and housing analyst and a real estate investor myself. Today we've got a great and I think really important show for all of you, so we're going to get right to it. If you listen to this show, you probably know this, but I do not like the definition of recession in the United States. This is a big gripe of mine. I do not make this any secret. I think the word has basically become meaningless in our society for two major reasons. First and foremost, and probably most importantly, there actually is not a definition of recession in the United States that is really cohesive.

2:14I know a lot of people think that it is two consecutive quarters of negative GDP growth. That is a commonly used benchmark, and I'm going to talk about that in a second. But that is not actually any sort of official thing. That's just what most people use. The official way that we get recessions in the United States is an entity called the National Bureau of Economic Research. And they are responsible with telling us when recessions start and when recessions end. And they actually do it retroactively after all that stuff happened. So it's not really the most useful. Now, the Ember, National Bureau of Economic Research, they do not use that two quarters of GDP growth.

2:53I know a lot of people think this, but look this up. I'll actually read it to you. On Enver's website, they say, the Enver definition of a recession emphasizes that a recession involves a significant decline in economic activity that has spread across the economy and lasts more than a few months. In our interpretation of this definition, we treat the three criteria, depth, diffusion, and duration as somewhat interchangeable. That is, while each criterion needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.

3:29Well, if you're confused by that definition, welcome to the club. It's basically just saying we got a bunch of criteria and we decide when it ends. So they are admitting that this is entirely subjective. What is a recession in the United States is entirely subjective. So that is the first reason I think the whole word recession has become corrupted. The second thing is because this definition, the real definition is so subjective, people use a rule of thumb, which makes sense, right? People are like, we need something to measure rather than just relying on these academics to decide when we have a recession.

4:05So they use this rule of thumb, which is two quarters of negative real GDP growth. GDP is gross domestic product, measures at the highest possible level all the macroeconomic activity of an economy. And real GDP just means inflation adjusted GDP. And basically, a lot of people say that if that is negative two quarters in a row, that's a recession. It's a pretty good indicator. Like if that happens, that's not good for the economy. And so it is somewhat useful. but I actually don't think personally that GDP is a great reflection of how ordinary people think of a recession. Like if you went up to the average American and asked if we were in our session right now, they might say no, but then if you ask them if their financial lives are getting better or worse, they'd probably say worse, right?

4:56That's, I mean, literally, there are consumer sentiment surveys that show this. It is the lowest it's been in 70 years. So clearly people are not happy about the economy. Meanwhile, GDP is actually growing. It grew 2 % in real terms last quarter. And so in my opinion, there's just this disconnect, right? The definition of recession is subjective. But even if you use the traditional measure of GDP, it is totally disconnected from the actual experience of Americans. Ordinary Americans care about how much stuff costs. Can they afford a home? Are they worried about their job? Can they find a job? Are their wages growing up?

5:35Meanwhile, we're measuring GDP, which if you want to know the definition is consumer spending plus investment plus government spending plus the balance of trade, which is equal to total exports minus total imports. Cool. I mean, the formula does have value, like for businesses, right? For the government, that does kind of matter. But if a recession is supposed to describe a decline in economic activity that spreads across an economy, but we're only measuring super macro things and we're not actually measuring what's happening with ordinary people on a micro personal level, we're missing a big part of the story.

6:12So if you asked me if you were starting from scratch and I was asked, Dave, how would you evaluate in a recession or not? Would you pick GDP? Because I wouldn't. And I decided I'm not going to because I just am tired of arguing. Everyone argues about are we in a recession or not? It becomes really political because it's just such a bad measurement. And so back in November, I spent a huge amount of time thinking about this and trying to determine what exactly is the right way to measure a recession. I wanted it to be simple and easy for everyone to understand. No subjectivity, just a yes or no answer to whether the economic lives of Americans are getting better or worse on average.

6:56And what I came up with is simple. It's a two part rule. If one of these rules is triggered, we're in what I would call like a yellow alert kind of recession, a mild recession. If both are, it is a full on serious recession. And here are the two rules. Number one, the question is, are real wages going up or down? Super simple, right? Real wages, if you've never heard that term, that's basically just a measurement whether or not incomes for the average American are growing faster or slower than inflation. If real wages are growing up, that is great. Spending power is going up. If real wages are going down, that's not good because for the average person, they're able to buy less and less, even if their wages are going up a little bit because inflation's eating away at their spending power.

7:48And to me, this single metric is what matters more than anything, right? I look through dozens of possible things to think about as indicators, and I can't think of something that is more important to regular people than this single question. If you are going out and working every day, is your economic life getting better or worse, right? If it's getting worse, kind of think we're in a recession, right? That is a significant economic decline, at least in my opinion. So that's rule number one. And I wanted it, I'll be honest, I wanted to keep it at one rule, but I did decide that I also needed a measurement of volume.

8:26I know this is nerdy, but we need to know how many people are actually working because if real wages are going up, but only 90 % of people employed, if there's 10 % unemployment, right? That's not good. You can't just have wages rising on average, but no one is really working. So I put in a measurement of unemployment, very similar to the SOM rule. If you're familiar with that, it's a very popular recession indicator. I'm a big fan of it. Basically it says unemployment is rising sharply. Specifically, in my definition, the three-month moving average is 25 % higher than the three-year moving average.

9:01You don't need to worry about that. It's pretty nerdy. Basically, it just means is unemployment rising quickly? That's rule number two. And when you put those two things together, that's my definition of a recession. These are the things I think ordinary people actually care about, what actually matters to them. If one of the rules is triggered, yellow alert, mild recession. Both of them are triggered, red alert, significant recession. And guess what? As of last week, one of them has been triggered. We do have to take a quick break, but after the break, I'm going to explain which trigger has fired, what direction the economy is heading, and what this means for you.

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12:15Welcome back to On the Market. I'm Dave Meyer talking about the Main Street recession indicator that I came up with and that recently just turned from growth to recession. Before the break, I explained that I actually have two rules. And if one of them triggers, we're in a mild recession. Both of them trigger, we're in a more significant one. Luckily, only one of them has triggered and it is the real wage growth trigger. It's the one I think is the most important right now. And as of last week, real wages are now negative. Average hourly earnings grew 3.6 % year over year in April 2026, which on its face sounds good, right?

12:52That's pretty good. If you just look at that in isolation, 3.5 % year over year wage growth, it's great. But inflation hit 3.8 % annually in April 2026. It's the highest level it's been since May of 2023. Big jump in the last couple of months. And inflation is just getting worse, right? Actually, if you annualize the last three months, you extrapolate February, March, April together. It's on pace to be over 7%. Hopefully that won't happen, but it's just not encouraging. And so basically when you do the math, right, if you look at 3.8 % inflation, but 3.6 % wage growth, That means that real inflation adjusted average hourly earnings decreased from April 2025 to April 2026.

13:39Right. Wages are now officially losing to inflation. Or in other words, on average, Americans are losing spending power. This is the bad economic outcome that I created this indicator around, because this to me is pretty bad. And it's true, though. Like the good thing is it's just one month, right? Like hopefully inflation will come back down. I personally don't think that's going to happen, but I hope I'm wrong about that. There's no real sign that inflation is slowing down. In fact, it's accelerated the last three months. So I see trigger one here, real wage growth turning negative. I think we're on yellow alert.

14:20Like normally, if it was just one month, I'd say, let's see what's happening. But the trends are kind of clear. I'd be pretty surprised if we saw a reverse next month or the month after that. So I think we're at least in sort of this mild Main Street recession for at least the next couple of months. Luckily, though, when you look at trigger two, unemployment, which I define as the SOM rule, but we'll just talk high level about unemployment because the SOM rule is really nerdy. Basically, this is OK right now. Like we're not there yet on unemployment, which is good news. It's been remarkably stable, honestly.

14:53Actually, unemployment as of April 2026 was 4.3%. That's unchanged from the prior month. And so things are pretty stable. This trigger has not fired. I have been continuously impressed that the unemployment rate hasn't gone up more. You know, all this doom and gloom about the labor market, some of which I admit I do buy into and I think that there is risks in the future. But like the unemployment rate hasn't gone up that much. The labor market has been remarkably resilient. I will say, though, if you listen to the show, you know that I personally believe that labor market data is a bit tricky.

15:32I don't think there's any one good indicator that tells the whole story, including the unemployment rate. It is tracked in a very specific and unique way, and it tells a story. It does not tell the whole story. If you look at other labor data, though, it does show some cracks starting to form. So again, not there yet, but like, for example, if you look at the U6 measure, this is just the measure of labor underutilization, which sort of like accounts for people who want to work full time, but they're working part time. Instead, that has gone up to 8.2%. So that is high. If you look at the number of people, just total part time work that is rising.

16:12It rose a lot, almost 10 % in April. And those are people who prefer full time work, but can't find it. So overall, labor market doing OK, but it's something that we have to keep an eye on. But big picture here by my indicators. And again, I made this up, but I do believe these are super important indicators for ordinary Americans and for real estate investors, because if ordinary Americans finances are struggling, this is going to trickle into the rest of the economy, right? Like this is going to impact other parts of the economy, whether it's housing or anything else. So a lot of you will probably think, Dave, you made this up.

16:50GDP is going up. So we can't actually be in a recession. Well, first and foremost, again, GDP is not the official definition of recession. There is no definition. So if everyone gets to be subjective about it, I get to be subjective, right? So that's why I made up my own indicator. But there is some truth to this, right? Like GDP is up. That is good news. I don't want to totally discount GDP growth because all things being equal, we want GDP to be going up. That is good for the country. That means the pie is getting bigger. Actually, in Q1 of 2026, last quarter we have data for, it grew in real inflation-adjusted terms at 2%, which isn't great, but it's not bad.

17:30It's pretty solid. But I actually think GDP used to be more useful as an economic measurement. Like when people were more working in manufacturing, for example, the GDP formula takes that into account pretty heavily. What it doesn't do is really talk about, one, how the pie is being divided, or two, what pieces of the pie are actually growing. And right now, I feel like that part is really important because almost all of the growth that we're seeing in GDP, like literally all of it, is coming from one single sector, and that is infrastructure spending on AI. In Q1 2026 alone, last quarter when it grew 2%, which is solid.

18:14AI-related capital expenditure was responsible for approximately 75 % of US growth. All the growth, 75 % of it came from that one thing. If you actually like stripped out what basically six companies are spending on building data centers, growth was effectively flat. And if you look at who's actually doing this spending, again, it is super, super concentrated just to a couple of companies. It's Amazon, it's Alphabet, it's Meta, it's Microsoft, it's Oracle. They are spending$805 billion in capital expenditures. And that's actually supposed to go up next year, by the way, to 1.1 trillion. And I think this is a really important example because these companies, huge, valuable companies to our economy, right?

19:01They're investing a lot of money back into the economy, which does have some value. They're also laying people off right now, Right. And so this is why GDP is not a great measurement of what's going on for normal people. Right. These companies spending a lot of money on data centers, which don't really employ a lot of people, laying off people at the same time. And so this is why we have such a disconnect with what we hear with recessions in GDP and what is actually happening with normal people. So I am not saying GDP is useless. I just think if we're defining a recession and we're talking about recession, normal people talking about recession, GDP is maybe a part of that story, but to me is a less important story than what's actually going on in American households and in Americans' pocketbooks.

19:49So all in all, just a summary of this, by my indicator, yes, we are in a recession, a mild one right now. Again, it's only been one month. Only one of the two triggers have fired. But I do think this matters. I do think this is going to affect real estate investors. I think it is going to impact the rest of the economy. And I'm going to talk about how and what real estate investors should be thinking about and doing right after this quick break. We'll be right back. Quick gut check. If your investments are generating income, how much of that are you actually keeping? Because a lot of people, they focus on yield and ignore tax impact completely.

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23:57Just as a recap, my thesis is that when real wages are going down and spending power is going down for the average American, we're in a recession. That is a negative economic environment. And whether or not you think GDP is more important or not, I personally believe that this is going to impact our economy perhaps more than what is going on with GDP right now. So I just want to go over a couple of things I've been thinking about and some advice, at least on what you should be thinking about and doing in the months to come. First and foremost, remember, if you hear people talking about a recession, are we in a recession or not?

24:34Remember that that is entirely subjective and it means almost nothing at this point, right? It really doesn't. It's not even defined by GDP. It's just whether a bunch of academics decide we're in a recession or not. So instead, I really encourage you to track the metrics that actually matter to you and to your business. And this is going to be different for everyone. But the stuff that I look for in my own investing and in my own decision making, I already told you the big one, which is real wage growth. I think this is going to be a major indicator of the economic future for months to come. if we continue to see negative real wage growth i believe that we're going to see that spread perhaps to gdp to consumer spending perhaps to lower corporate profits i'm not saying this is going to be a disaster that this is going to be some severe recession we don't know that yet it's one month right but this is something super important to pay attention to obviously with the rest of your investments for your job and everything like that but as a real estate investor If you start seeing real wage compression, if this comes down, that affordability challenge that we've been talking about for four years on this show, that gets worse, right?

25:49Both for renters and for homebuyers, right? That could negatively impact rent growth. It could negatively impact occupancy rates. It can negatively impact home prices. This is a super important thing. And I think, honestly, not to knock on anyone, but I think it's an overlooked element of the housing market that I don't hear a lot of other analysts talk about. They talk about interest rates and home prices. Super important, right? But we always on the show, when we talk about affordability and why I think it's so important, it's a three-legged stool. There are three pieces to affordability. It's mortgage rates, it's home prices, and it's wage growth.