Last week, we learned the U.S. economy likely shrank for the second consecutive quarter as the advanced government estimate of gross domestic product came in at -0.9%. Now, the country has been thrust into a politically-heated debate: Are we in a recession?
The Biden administration and political appointees say no.
“That doesn’t sound like a recession to me,” President Joe Biden said Thursday, touting economic wins.
But if you ask Republicans and conservative thinkers, you’ll get a different reply.
“We are officially in a recession,” Fox Business anchor Maria Bartiromo declared on the air after the GDP reading came out.
“This morning, the government announced what every American has been feeling for nearly a year: We are in a recession,” Minority Leader Rep. Kevin McCarthy, R-California, said on the House floor.
Asked on Fox News if he considers two quarters of negative growth a recession, Sen. John Kennedy, R-Louisiana, replied, “Yep.”
“I think the position of the [Biden] administration is: The definition of a recession is whatever is in the teleprompter,” Kennedy added.
Who to believe on recession calls?
To start, not one of those people make the call on whether or not the economy is in a recession. That’s up to the National Bureau of Economic Research and a private panel of economists established in 1978 to keep politics out of the process. In fact, this committee meets in secret and the public won’t even know they’ve met unless a formal decision is made.
Recession announcements by the NBER Business Cycle Dating Committee are not timed and do not take political cycles into account. When the group of economists is sure of what the data is saying, it announces it, regardless of political impact. The committee has never reversed a call.
But that level of confidence can take a long time. Recessions are often declared months or even a year after the start. The American public and Wall Street are not that patient, so we look for hints the economy is in recession, like two consecutive quarters of negative growth, while we wait for the official call.
Current state of the economy
The most convincing evidence the first six months of 2022 was not a recession comes from the labor force.
“There are just too many areas of the economy that are performing too well, and of course I would point to the labor market in particular,” Powell said.
In every recession looking back more than seven decades, unemployment was either climbing prior to the recession or rising at the start of it. While GDP contracted in 2022’s first six months, unemployment actually went down, from 4% to 3.6%, which is near a 50-year low.
So have we been in a recession with unemployment going down and payrolls going up? Probably not, especially when you consider that, according to the NBER, “In recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment.”
That said, does it mean economic conditions are rosy? Absolutely not. With 40-year high inflation and the Fed raising its interest rate, financial situations feel pinched. Now, entering the second half of the year, we are seeing more signs of a significant slowdown.
- Real wages – that is, wages adjusted for inflation – are falling.
- Unemployment claims are starting to pick up, though they are still historically really low.
- Americans are starting to spend less money, feeling the impact of 9.1% inflation.
- The housing market is declining, especially in investment.
All of this together has consumer confidence dropping. The Conference Board index is now at its lowest level since February 2021.
“Some may worry that the economy, that the labor market will weaken, but I think the biggest burden that’s weighing negatively on household sentiment is inflation, and that’s why that is our top priority in terms of addressing that,” Treasury Secretary Janet Yellen said Thursday after GDP figures were released.
At the end of the day, semantics over economic conditions doesn’t matter when Americans are struggling to feed their family and fill up their car. Whether it’s called a recession or not, it’s clear the robust economic recovery period is over.