Why the U.S. isn’t in recession now — and why it might not be able to avoid one

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The official scorecard for the US economy contracted in the spring for the second quarter in a row, matching an old rule of thumb for when an economy is in recession.

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Is the US really suffering its second downturn in three years? If not, why not? And what comes next for the economy?

Is the US in recession?
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No, at least not officially.

While an old saw says two straight declines in gross domestic product constitutes a recession, the group of responsible for making an official declaration takes a broader view. They look at hiring, unemployment, income growth, consumer spending and the like.

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Typically a real recession results in rapidly rising unemployment, falling incomes and a drop in spending. None of those things are happening right now.

The unemployment rate, for instance, still sits near a 54-year low of 3.6%.

That’s why you won’t find any professional economists saying a recession is already here.

“Are we in recession now? Almost certainly no,” said chief economist Gus Faucher of PNC Financial Services in Pittsburgh, Pa.

“Job growth has averaged a very strong 375,000 over the last three months, businesses continue to invest, and consumer spending and household incomes are rising,” he noted.

How do you explain the 2022 first half?

GDP is a complex and sometimes bewildering report given the huge size of the US economy.

Take the first quarter. GDP shrank at a 1.6% annual pace mostly because of souring imports and a record trade deficit. But surging imports usually reflect strong consumer spending — exactly the opposite of what happens when the economy is slowing.

The second quarter, meanwhile, saw a huge drop in the amount of inventories that companies stockpiled.

The decline in inventory levels subtracted 2 full percentage points from GDP and turned what would have been a positive number into a negative one. GDP shrank by 0.9%.

Consumer spending, on the other hand, rose at a 1.8% annual pace in the first quarter and 1% in the second quarter. That’s a big deal since 70% of what goes on in the US economy results from consumer spending.

Historically, consumer spending has usually fallen when the US experiences a contraction in GDP.

Is a recession coming?

Maybe. The Federal Reserve has raised US interest rates sharply and plans to raise them even higher to try to suppress the highest inflation in almost 41 years.

Higher rates strangle inflation by reducing consumer demand for goods and services and by discouraging businesses from hiring, investing and spending.

Unfortunately, higher rates also tend to trigger recessions. Many economists think the US will sink into a recession by the end of 2022 or sometime in 2023.

“While the economy may not be quite in a recession yet, the odds that we will be in a downturn soon have increased sharply,” said chief economist David Berson of Nationwide.

How will we know?

That group of prominent economists we mentioned? They make the call.

Who are they? Eight economistsboth liberal and conservative, whom are members of a private organization called the National Bureau of Economic Research.

The NBER was founded in 1920 to try to provide accurate economic analysis free of government influence or interference.

The NBER uses a rather broad definition of recession than simply two straight quarters of negative GDP. You can read the definition here.

Even if the NBER declares a recession, however, it usually waits an average of six to 12 months after the fact to do so.

Why the delay? The NBER wants to make sure it gets the call right. Sometimes GDP reports are revised sharply. A quarter that initially showed a decline could be revised to show an increase. Or vice versa.

What about prior recessions?

Every recession is different. While almost all recessions have involved several consecutive quarters of declining GDP, that hasn’t always been the case.

Consider the 2001 recession. The economy shrank in the first and third quarters, sandwiching an increase in the second quarter.

The economy also contracted two quarters in a row in 1947, but the NBER did not declare a recession.

Why is this such a big deal now?

Polls show many Americans already believe the US is in recession. That could change how households and businesses behave. Some people might spend less and save more. And businesses might reduce plans to hire and invest.

There’s also a big election coming in the fall. Democrats are poised to suffer a big defeat and possibly lose control of the House and Senate to Republicans.

Hoping to retain control, the Biden White House has been aggressive in trying to persuade the public that the economy is not in recession.

Republicans, for their part, have sought to persuade the public that Democratic policies are responsible for high inflation and a slowing economy.

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Credit: www.marketwatch.com /

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