With the release of the second-quarter GDP figure, the economy was considered to be in a recession. But it will be months, if not more, before we can say for sure if it is recognized as such.
This is due to the fact that the Business Cycle Dating Committee of the National Bureau of Economic Research, which serves as the official judge in such cases, does not adhere to the widely accepted criteria of at least two consecutive quarters of negative growth.
The NBER defines a recession as “a major fall in economic activity that is spread across the economy and lasts more than a few months,” rather than any short-term decline in economic activity.
That can indicate declining quarterly trends. In reality, the NBER has officially proclaimed a recession each and every time since 1948 that the GDP has declined for at least two consecutive quarters. According to the Bureau of Economic Analysis, second-quarter GDP fell by 0.9 percent and first-quarter GDP fell by 1.6 percent.
However, the bureau doesn’t even consider GDP to be a significant influence in its decisions, and therefore proclaimed a recession in 2001 despite no ongoing reductions.
Prepare yourselves for another surprise, as almost no prominent Wall Street economists anticipate that the NBER will report that the U.S. economy experienced a recession in the first half of 2022.
According to Mark Zandi, chief economist of Moody’s Analytics, “we weren’t in a recession for the first half of the year, but probabilities are rising we will be by the end of the year.”
Like his colleagues on Wall Street, Zandi said that the NBER won’t proclaim a recession because of the active labour market, which despite adding 457,000 jobs a month this year, is still not at pre-Covid levels. But others exist.
“We overproduced jobs. We experienced record-low layoffs and record-high open positions. Both consumer and company investment were up, he claimed. I simply can not see them announcing a recession.
On Wednesday, Jerome Powell, the chairman of the Federal Reserve, said he didn’t believe the economy was actually in a recession and even questioned the veracity of the GDP figures.
According to Powell, the situation “doesn’t appear like” a recession at the moment. The GDP numbers should be seriously questioned since the labour market is simply sending such a strong signal of economic strength.
The NBER standards on Recession
Even though the NBER is scarcely well-known, government and corporate news organisations rely on its pronouncements when judging expansions and contractions.
Some factors are usually believed to be used by the organization:
- Real personal income minus transfer payments
- nonfarm payrolls
- the household survey conducted by the Bureau of Labor Statistics
- real personal consumption spending
- sales that have been adjusted for price changes
- industrial production
In a client note earlier this week, Wells Fargo senior economist Tim Quinlan stated, “If this definition feels involved, it’s because it is. It’s difficult to define a recession since it involves more than just how long a slump lasts and also how severe and pervasive it is across the economy.
Quinlan stated that the situation is rapidly reaching even the NBER’s criteria following Thursday’s GDP announcement.
The clear worsening in economic activity shown in today’s 0.9 percent drop in Q2 real GDP makes it much more difficult to insist on a precise definition of recession, he said. “However, real consumer spending kept advancing, and the labour market is remained strong. Although it is too soon to declare this growth over, the time is drawing near.
Political implications over Recession
Recession is now a contentious political issue.
When the White House published a blog post earlier this month arguing that the economy is not in a recession, it caused some controversy. Critics claimed that by mentioning the NBER factor, the media was complying with the administration’s attempt to modify a long-standing definition.
According to the article, the genuine definition of recession takes into account “holistic data” including “the labour market, consumer and business spending, industrial production, and earnings.”
According to these figures, it is doubtful that the first-quarter GDP fall this year—even if it is followed by a second-quarter GDP decline—indicates a recession, the post stated.
“Policymakers will undoubtedly become entangled in their attempts to justify why the American economy is not in a recession. They do, however, make a compelling point, according to Principal Global Investors’ chief global strategist Seema Shah. “A recession is officially defined as two consecutive quarters of negative growth, although other timely economic statistics do not support recession.”
The economy is still in serious trouble even if the NBER does not proclaim a recession in the first half. Significant hazards lie ahead due to rising interest rates, sustained inflation, and historically pessimistic consumer and business sentiment.
Many of the same experts who questioned a recession during the first half of the year believe one is very likely to occur over the next year or so.
“People’s attitudes are quite depressing. The Moody’s economist Zandi declared, “It’s about as dark as I’ve ever seen it. “In terms of the simple expectation of this impending poor economy, I’ve never seen anything like it. Of the end, a recession is a decline in faith. Businesses lose faith in their ability to sell their products, consumers lose faith that they will have work in the future. Because the risks are so great, we lose faith and enter a recession.