Is the United States in a recession? It’s a question that plagues consumers, politicians and investors around the world. Today, we have taken a step further to answer it. And the answer is: maybe?
How do we define recession
For many, the unofficial rule of thumb is that a recession started after two consecutive quarters of economic contraction measured by a decline in gross domestic product (GDP) – a broad measure of the price of goods and services. During the first three months of the year, GDP contracted at an annual rate of 1.6%.
Today, the Commerce Department announced that GDP fell again by an annual rate of 0.9% in the second quarter.
So that’s it?
Not so fast. Officially, the National Bureau of Economic Research (NBER) – a nonprofit group of economists – defines when the United States is in a recession.
The NBER looks at GDP but also employment figures, personal income, industrial production and other factors. He defines a recession as “a significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.”
Federal Reserve and Administration officials would also prefer the public not to think of a recession as defined solely by GDP – and presumably not to think of it at all – so they point out that the picture is more complicated.
Are they right?
Yes and no. Look at the labor market. The unemployment rate is 3.6%, near a half-century low. Wages are also rising, but not as fast as inflation, and 2.7 million people were hired in the first half.
But at the same time, consumer confidence has plummeted, inflation is causing real hardship even for those with jobs, the once white-hot housing market is rapidly cooling in some areas, stock markets are jittery , it’s the least we can say. On top of that, you can bet that if Republicans were in power, Democrats would call a two-quarter drop in GDP a recession.
What are politicians and government officials saying?
Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen argued that inflation would be “transitional” for much longer than realistically, and they could do it again, accepting the reality of a recession. They are both keen to promote the idea that it is possible to cool the economy without causing it to recoil abruptly – the so-called “soft landing”.
In many ways, it is an act of linguistic balancing, with vast political consequences. On Wednesday, the Fed raised rates again sharply and Powell was repeatedly asked whether the United States was in recession or heading into a recession. Powell said he doesn’t believe the US is in a recession but – and that’s a big but – he expects Fed rate hikes to slow the economy and the stock market work weakens. It will certainly look like a recession to some.
How unprecedented is the economic situation?
In a word, extremely. Covid has disrupted the global economy in ways we have never experienced. And this disruption – just like Covid – is still with us. We have 40 years of high inflation, wars in major commodity-producing regions, falling real wages, slowing economic growth, and a Fed that is aggressively tightening the money supply after years of low rates. At the same time, the labor market is good and consumer spending – the main driver of the economy – is decent, for now.
Nobel laureate in economics and New York Times columnist Paul Krugman called it “the economics of farce” – for him, the numbers “don’t add up”. It may take going into a recession to understand what is going on.