Is the US in a recession? It is a question weighing on consumers, politicians and investors worldwide. Today we came a step closer to the answer. And the answer is: maybe?
How do we define recession?
For many, the unofficial rule of thumb is that a recession has started after two consecutive quarters of economic decline as measured by a fall in gross domestic product (GDP) – a broad measure of the price of goods and services. In the first three months of the year, GDP fell at an annual rate of 1.6%.
Today, the Commerce Department announced that GDP contracted again at an annualized rate of 0.9% in the second quarter.
So that’s it?
Not so fast. Officially, the National Bureau of Economic Research (NBER) – a non-profit group of economists – defines when the US is in a recession.
The NBER looks at GDP, but also at employment figures, personal income, industrial production and other factors. It defines a recession as “a significant decline in economic activity that is widespread across the economy and lasts more than a few months”.
Federal Reserve and administration officials would also prefer that the public not think of a recession as defined purely by GDP—and presumably not at all—so they emphasize that the picture is more complicated.
Are they right?
Yes and no. Look at the labor market. The unemployment rate is 3.6%, close to the lowest level in half a century. Wages are also rising, albeit not as fast as inflation, and 2.7 million people were employed in the first half of the year.
But at the same time, consumer confidence has collapsed, inflation is causing real hardship even for those with jobs, the once white-hot housing market is cooling rapidly in some areas, stock markets are jittery to say the least. On top of that, you can bet that if the Republicans were in power, the Democrats would call two-quarters of the GDP decline a recession.
What do politicians and government officials say?
Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen argued that inflation would be “transient” far longer than was realistic, and they may do so again and accept the reality of a recession. They are both keen to promote the idea that it is possible to cool the economy without turning it into reverse – a so-called “soft landing”.
In many ways, it is a linguistic balancing act, with broad political consequences. On Wednesday, the Fed raised interest rates sharply again and Powell was repeatedly asked whether the US was in, or headed for, a recession. Powell said he didn’t think the U.S. was in recession, but — and it’s a big but — he expects the Fed’s rate hikes to slow the economy and the labor market to weaken. It will certainly feel like a recession to some.
How unique is the economic situation?
In a word, extreme. Covid disrupted the global economy in a way we have never experienced. And that disruption – much like Covid – is still with us. We have a 40-year high in high inflation, wars in key commodity-producing regions, falling real wages, slowing economic growth and a Fed aggressively tightening the money supply after years of low interest rates. At the same time, the labor market is good, and consumption – the biggest driver of the economy – is OK for now.
Nobel laureate in economics and New York Times columnist Paul Krugman has called it “the sham economy” – for him the numbers “don’t add up”. It can take going into a recession to figure out what’s going on.