Here’s how to recognize a stagnation, and it’s not what you think

Everyone who cares knows that recessions happen when there are two consecutive quarters of negative growth—everyone, except for the people who actually decide when the economy is in a recession.

For these people, at the National Bureau of Economic Research, defining a recession is more difficult.

Formally, NBER defines a recession as “a significant decline in economic activity that spreads through the economy and lasts for more than a few months.” In fact, the bureau’s economists state that GDP, the broadest measure of activity, is not used as a primary measure.

People shop at a supermarket as inflation affects consumer prices in New York City, June 10, 2022.

Andrew Kelly | Reuters

This is important, because the data coming on Thursday could indicate that the US experienced a second consecutive period of negative growth in the second quarter. Although every period since 1948 of two consecutive negative quarters has coincided with a recession, this time it may not.

why? It is complicated.

“The National Bureau of Economic Research would be a laughingstock if they said we experienced a recession when we were creating 400,000 jobs a month,” said Dean Baker, co-founder of the Center for Economics and Policy Research. “I can’t even imagine for a moment they would think we’re in a recession.”

In fact, nonfarm payrolls grew by an average of 457,000 per month during the first six months of the year, conditions hardly linked to the economic downturn. Moreover, there are only 11.3 million jobs and 5.9 million workers available to fill them, indicating that employment should remain strong.

stagnation issue

But there were downsides, too.

Dollar-level consumer spending was solid, but when adjusted for a 40-year high for inflation, it was much lower. The US trade deficit hit a record in March, another negative level for GDP. Inventories have lagged, also hurting growth as it is measured by the Bureau of Economic Analysis.

But to the public, these are just details that are left to economists to figure out. If the second-quarter GDP number is negative, and journalists and the White House don’t call it a recession, it is bound to provoke confusion and perhaps some anger from those who have been hit by rising inflation and an apparent slowdown in aspects of the economy.

After all, there are so many things to make of it Feel Such as stagnation from rising prices, widespread product shortages, and warnings from companies like Walmart that profits are shrinking due to changing consumer habits, to name a few.

The first quarter saw GDP contract 1.6%, and the Atlanta Federal Reserve’s real-time tracking indicates the same decline in the second quarter.

“I think it’s still just a game of semantics. And obviously the trajectory of economics is less, whether we’ll define it as [a recession] Or not. If anything, the third quarter is going to show more weakness. So you could have three straight quarters of contraction for GDP. Does that technically mean Are we in a recession?”


For its part, the Cambridge, Massachusetts-based NBER is a somewhat obscure group, meeting in private and generally not making slack calls months after it started, and sometimes not until after it’s over. Her latest call came from the Covid-19 downturn, which she said began in February 2020 and ended two months later.

However, government and most commercial news outlets take NBER judgments as gospel when determining expansions and contractions.

The organization is generally believed to use six factors: real personal income minus transfer payments, non-farm salaries, employment as measured by the Bureau of Labor Statistics household survey, real personal consumption expenditures, sales adjusted for price fluctuations and industrial production.

NBER did not respond to CNBC’s request for comment.

“If you feel that definition is implied, it’s because it is,” said Tim Quinlan, Wells Fargo’s chief economist, in a note to a client. “Defining a recession is not easy and extends beyond just a period of contraction to how deep and pervasive it is throughout the economy.”

Quinlan said the data points can be broken down into four larger groups: production, income, employment and spending.

“The economy was not in a recession at all when at least three indicators of the National Bureau of Economic Research rose during the month,” he said. “Although we don’t have real sales until May, non-farm employment, real personal income minus remittances and industrial production all rose during the month, indicating that the economy has not yet entered a recession.”

If the NBER doesn’t call for a recession anytime soon, the next question will be what will happen in the future.

Boockvar sees recession as an inevitable, with NBER announcing just a matter of timing. “I wouldn’t be surprised if the recession was due to start a little later,” he said.

Despite all his optimism about growth in the first half, Baker said he expects a 0.4% increase or decrease in GDP. After that, he admitted that there was still a chance of a recession in the coming months, although he believed there was a good chance that the United States would avoid that fate.

Like many others, Baker fears that Fed rate increases intended to control inflation and slow the economy may overdo it and cause deflation in the future.

But he is sure that conditions since the first half do not indicate a recession.

“Were we in a slump in the first half? That doesn’t make sense,” Becker said. “People at the National Bureau of Economic Research, I respect them as serious economists. There is no way they can say this is a recession.”

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