The US economy shrank an estimated 0.9% from April to June, the Bureau of Economic Analysis reported on July 28, 2022. This follows a contraction in GDP of 1.6% recorded in the first quarter of the year.
Some observers suggest that two quarters of contraction mark a “technical downturn” or an “informal start” of one, while others suggest that it at least gives fear or signals that it is on the way. Federal Reserve Chairman Jerome Powell apparently thinks otherwise. On July 27, after raising interest rates by 0.75 percent, Powell told reporters, “It’s a strong economy and nothing about it suggests that it’s nearing a recession or weakening.”
Confused about whether America is in recession or how to know when one hits? If you are, join the club.
So The Conversation US asked Brian Blank, a financial economist at Mississippi State University, to explain what’s going on in an economy and what factors determine whether it’s in a recession.
What did the latest GDP report tell us?
The economy is really hard to pin down right now.
First, the question everyone is talking about is the release of the less-than-impressive GDP report, which showed contraction after adjusting for inflation.
Some aspects of the report were positive, such as consumption – how much people are buying – still up slightly and trade fixed investment – how much companies spend on machines and factories – was flat to avoid a fall in earlier forecasts.
For some more negative news, investment in residential housing and property declined 14%, which is understandable considering how much it was rising as the pandemic upended the housing market. In addition, a decline in private inventory investment — how much goods companies have produced but not yet sold — probably had the biggest impact on the negative second quarter figures. While the decrease in inventory could be a sign of strength from sales of products, the decline reduced overall GDP by more than 2 percent.
And overall that means the US economy has technically shrunk for two quarters in a row, which is why you see a lot more economists, journalists, and others using the dreaded “R” word: recession.
Associated Press Photo/Andres Kudaiki
What is a recession anyway?
Two quarters in a row of contractions are the shorthand journalists and many others use to describe a recession.
In the US, however, the economy is officially considered to be in recession only after the National Bureau of Economic Research, a non-profit and non-partisan organization.
The Bureau defines a recession as “a significant decline in economic activity that extends across the economy and lasts for more than a few months.” Its business cycle dating committee, made up of eight economics professors, meets to determine when a recession begins and ends. It uses three major criteria:
1) How fast is the economy shrinking. 2) How many aspects of the economy are declining. 3) How long does the economy contract.
NBER defines recession as the time between the point at which an economy stops growing – the peak – and the point at which it starts growing again – the trough.
So are we in recession or not?
Identifying a recession is complicated, given that the economy is large and has many parts. Currently, some parts of the US economy, such as the labor market, are growing rapidly, while others, such as housing, are growing at a slower pace.
While two-quarters of economic contractions generally coincide with recessions, they generally do not even include the hot job growth seen in the US economy this year. And recession rarely occurs when unemployment – which currently stands at a nearly half-century-low 3.6% – is falling. The economy is generally not in recession if almost everyone who seeks a job has one.
In addition, recessions typically involve a fall in real GDP, which is similar to GDP, but instead measures exclusively income and production-related costs. In theory, they should more or less move up, but GDP continues to rise.
Another measure of growth is personal income, which has been climbing for most of the year and grew faster than spending in May. The Fed watches this metric closely because of its predictive ability, as does the National Bureau of Economic Research, in addition to unemployment.
For my 2 cents, I believe Powell is right. Given how strong the labor market is, the economy does not appear to be in a recession at the moment. Since 2.7 million more people now have jobs than at the end of last year, a key measure of the economy is still growing.
“There are many sectors of the economy that are doing very well,” Powell told reporters. “It doesn’t mean that the economy will be in a recession with things like this happening.”
That said, Powell and the Fed are doing their level best to contain rising inflation by slowing the economy — and there are concerns that doing so will lead to a recession. If you want a strong indication to tell if this is happening, look at residential investment as a percentage of GDP. Residential investment is how much a person spends on new homes and home improvements. Right now it is flat, but when it starts to decline, it is usually a bearish peak.
Keep in mind, 2021 boasts one of its best US economies in decades, so perhaps Americans can accept 2022. In some ways, an economy that isn’t growing very fast can also mean an economy that is keeping inflation under control, which suggests that sometimes not so much good news is actually good news. .
