The US economy declined 0.9% in the second quarter of 2022 compared to the previous three months after shrinking 1.6% in January-March, entering, in theory at least, a "technical recession" — economist-speak for two consecutive quarters of economic contraction. But does that make it official? Nope.
Many economists regard that definition as too narrow because it doesn't take into account other indicators beyond real GDP performance. Indeed, the National Bureau of Economic Research, which calls the shots on US economic cycles, says, rather vaguely, that a recession is "a significant decline in economic activity that is spread across the economy and that lasts more than a few months."
To determine what qualifies as a recession, the NBER considers a bunch of other measures of economic activity. These include real wages (minus inflation), industrial activity, or employment — measured by household surveys, not the number of Americans applying for unemployment benefits, now historically low at 3.6% of the workforce.
Also, the NBER takes time to make the call. So don’t be surprised if Americans feel they're in a recession way before the experts decide to label it as such. It’s also possible to have a recession without two consecutive quarters of economic contraction, like in 2001.
In a nutshell: don't buy all the recession chatter for now, but keep an eye out. Even if the Biden administration won’t say the R-word out loud and the Fed still hopes for a soft landing, most economists agree the US economy is more likely than not headed to a recession in 2023, if not earlier.
Warning: The following piece may change your mind. If all you’re looking for is confirmation of your existing view, read no further.
On Thursday morning, the Bureau of Economic Analysis released data showing that U.S. gross domestic product (GDP) fell at a 0.9% annual rate in the second quarter of 2022. This is the second straight quarter the economy is estimated to have shrunk.
Does this mean we’re in a recession? Not necessarily.
Two negative quarters of GDP growth is sometimes used by analysts and the media as a rule of thumb to call recessions because the two things often go together.
But “often” is not always. You can have a recession without GDP falling for two straight quarters, and GDP can fall for two straight quarters outside of a recession. The pandemic recession of 2020, for example, was the deepest downturn in American history... but it only lasted a month!
And contrary to popular belief, a two-quarter contraction is not the definition used by professional economists or by the U.S. government. Not now, not ever.
Is the US economy in a recession?FRED, National Bureau of Economic Research
So what is a recession and how do we know if we’re in one?
In the United States, recessions are defined by the National Bureau of Economic Research’s Business Cycle Dating Committee, a non-partisan panel of eight academic economists with no political agenda. They define a recession as "a significant decline in economic activity that is spread across the economy and that lasts more than a few months." In other words, an economic downturn has to be deep enough, broad-based enough, and long-lasting enough to be considered a recession.
The NBER has always explicitly said it does not base its recession calls on GDP alone, in large part because GDP data is mismeasured in real time and initial estimates are subject to continuing—and often large—revisions. This year’s first and second quarter estimates will almost certainly get updated multiple times as better data comes in.
In fact, if history is any guide, there’s a significant chance the real GDP growth number in Q1 and/or Q2 was actually positive. That’s why the NBER only makes recession in hindsight, based on revised data rather than initial estimates.
Many are rising slower than before and some are flat, but none are in a clear, significant decline. Consumer spending is still growing. Personal income looks solid. Employment levels, vacancies, and wage growth are holding up. Since the beginning of the year, the unemployment rate has fallen from 3.9% to 3.6% and around 2.7 million jobs have been created.
In short, several key parts of the economy remain quite strong, painting a picture that is inconsistent with what we normally call a recession. Importantly, downturns are usually associated with a run-up in layoffs, and we aren’t seeing that yet. The Sahm rule, another widely used recession indicator that looks at unemployment, is far from being triggered. As Fed chair Jerome Powell said on Wednesday, “there’s just too many areas of the economy that are performing too well” for there to be a recession right now.
That’s not to say the economy is in great shape.
Unlike NBER recession calls, the state of the economy is continuous, not binary. Things are better and worse, not just good or bad. For the typical American, the difference between GDP growth of 2.0% and 1.0% matters more than the difference between 0.1% and -0.1%. There is nothing magical about the 0% threshold.
What today’s GDP release does show is the economy is clearly slowing—or at least some sectors are. We may well be barreling toward a recession, as the IMF believes. That wouldn’t be surprising: we have very low unemployment, high inflation, and significant supply constraints that continue to hold down economic activity. The Fed has signaled its willingness to accept a mild recession to bring inflation down and restore price stability. By design, its rate hikes will over time act to slow demand. That along with other factors (e.g., the Russia-Ukraine war) is likely to cause a recession.
But there’s no evidence we’re there yet.
Of course, just because we aren’t in a recession doesn’t mean the economy is working for people. Inflation is at 40-year highs. Gas, food, and rents are expensive. Wages aren’t keeping up. All of this obviously contributes to the perception that the economy is bad.
That explains why consumer sentiment is in the dumps even as the unemployment rate nears a 70-year low. It also explains why the Biden administration is losing the political argument
Politics are driven by perception, which in turn is shaped by the information environment, partisanship, and confirmation bias as much as by actual economic fundamentals. Recession or not, Americans are feeling down about the economy, and no amount of explainers are about to change that.
Still, facts matter. A cost-of-living crisis is not the same as a slowing or shrinking economy. The economy can have very high inflation at the same time as it adds hundreds of thousands of jobs each month. We can bemoan the former while acknowledging the latter. Calling it a recession doesn’t make it so.
TL;DR: The economy is clearly slowing, although several areas are still growing. The NBER may end up calling a recession sometime down the road. But Thursday’s Q2 GDP release can’t tell us whether we’re in one already.
Ian Bremmer shares his insights on global politics this week on World In :60.
What does Biden hope to come from his trip to Saudi Arabia?
Well, first he hopes he isn't smashed by progressives in his own party after saying when he campaigned that he wanted to make Saudi Arabia into a pariah internationally. Traveling to Saudi Arabia and visiting with Mohammed bin Salman doesn't do that, but of course, $120 plus oil doesn't do that either. Look, I think it's sensible for him to go. I'm glad he's actually making the trip. In particular, he wants to see the Saudis increasing their oil production beyond present announced quotas to reduce the price. It's impacting Americans at the pump with record levels right now. He'd love to see Russia thrown out of OPEC Plus. I think that's plausible and beyond that, the possibility that Saudi Arabia and Israel would formally open diplomatic relations, an extension of the Abraham Accords which was one of the biggest accomplishments in foreign policy of the Trump administration. Biden's completely aligned with that and I think he's going to try to push on that. So, I do think there will be some direct takeaways from this trip that'll be positive for the Biden administration.
Is the bear market in the United States a prelude to a recession?
Certainly a lot of people think that. I've heard it directly from Larry Summers, I've heard it from Kristalina Georgieva at the IMF. I mean, I would say that a majority of economists out there believe that the United States is heading into a recession. Keep in mind that recessions of the United States come along fairly frequently. So it's not like it's that dramatic as long as it's narrow and it doesn't last very long, but still the mood has turned decidely negative, the level of inflation, the willingness of the Fed to go farther in raising rates and of course the impact on Biden's approval ratings, all of that in firmly fair market territory right now.
Will China's return to mass testing help combat China's COVID problem?
It certainly helps. They need a much greater level of surveillance, but the fact is you now have variants that are vastly more transmissible, infectious. They're closer to measles and that means that unless you are vaccinating everybody, and especially the older and those that are vulnerable from a health perspective, you can't prevent this disease from expanding wildly. What you have to do is make sure the people that get it, don't get really sick. I mean, we just had one bar in Beijing with 50 positive cases in one evening that clearly came from one person that showed up with COVID. That is an environment that doesn't lend itself to zero-COVID. It lends itself to, we have to live with the disease but we have to make sure we're vaccinating people, we have to make sure that we have adequate therapeutic responses. The Chinese are not where they need to be on either of those things. The disease has changed. China's response has not and that means zero-COVID is going to be with them for longer. The economic impact will last longer too.