Economic data in the US is sending mixed messages, complicating the answer to a seemingly simple question: Is the world’s largest economy in recession?
Figures released by the Commerce Department on Thursday showing a decline in gross domestic product for the second consecutive quarter intensified what has become a politically charged debate.
News of the second straight decline – a common sign of recession – followed signs that business activity across the country was beginning to slow. The US housing market is teetering and consumers are feeling increasingly pessimistic as the Federal Reserve steps up efforts to quell the highest rate of inflation in more than four decades with soaring interest rates.
The official arbitrators on whether or not the United States is in a recession – a group of economists at the National Bureau of Economic Research – have yet to make their official verdict.
But the policymakers in the White House have already made for them.
Ahead of Thursday’s report, Treasury Secretary Janet Yellen said she would be surprised if the National Bureau of Economic Research declared the current moment a recession. She doubled down on that view at a press conference after the data was released, noting that the massive job losses, business shutdowns and strained budgets that usually accompany recessions “are not what we see now.”
So did the Federal Reserve. Jay Powell, the head of the central bank, warned on Wednesday that GDP figures are being revised multiple times and that the first iteration should be taken “with caution.”
However, Republicans seized Thursday’s data immediately Branding “Joe Biden’s Recession”.
Those who have espoused the idea that the US is in a recession point to the fact that whenever there has been a successive GDP contraction in the past, a recession has – more often than not – been called by the NBER eventually.
“The ‘official’ definition of a recession is not consecutive quarters of negative real GDP,” said David Rosenberg, chief economist and president of Rosenberg Research. “But every time this happened in the postwar period, the economy was in a slump.”
Most economists share the White House and the Federal Reserve’s view that the US is not yet in a recession, but their confidence that the economy can avoid that outcome at a later time has declined significantly.
“Based on GDP data alone, we can’t conclude that we’re in a recession right now,” said Plerina Orochi, US economist at T-Roe Price. This could be a precursor to a recession. . . And we need to be careful not to rule anything out at the moment, because there is a lot of uncertainty.”
The National Bureau of Economic Research describes it as “a significant decline in economic activity that spreads through the economy and lasts more than a few months.”
The organization’s committee of eight economists meets in closed meetings to make this decision, usually with an interval of several months or years. The judgment is based on measures including monthly job growth, consumer spending on goods and services, and industrial production.
By these criteria, the current economic background unequivocally does not meet that limit, say officials at the Federal Reserve and the White House.
Last month, the economy added 372,000 healthy jobs and the unemployment rate settled at a historically low level of 3.6 percent. For every unemployed person, there are roughly two vacancies, making it one of the tightest job markets in recent history.
“We’ve never had a recession without layoffs, [and] I don’t think we’re close to a full layoff cycle. “There is no evidence for that,” said Anita Markowska, chief financial economist at Jefferies.
Economists refer to the stock base. The rule developed by Claudia Sam, a former Federal Reserve employee, states that a recession takes hold when the three-month moving average of the unemployment rate rises at least half a percentage point above its lowest level in the past 12 months. By this measure, the unemployment rate would have to exceed 4 percent to say the US is in a recession.
However, the GDP data included signs of weakness beyond the headline number indicating a less prosperous consumer and weaker investment. Citigroup economists have gone so far as to say that mid-2022 could mark a peak in activity.
“This is a very broad-based slowdown in spending,” added Jonathan Millar, a former Fed economist now at Barclays. While he backtracked on the idea that the US economy would soon slip into recession, he said it was a “very strong possibility” of that happening next year, and “really dependent going forward on how resilient the service sector is that we see.”
The US central bank is expected to press ahead with its plans to tighten monetary policy even as the economy slows, after raising interest rates by another 0.75 percentage points this week for the second consecutive meeting. Powell indicated further increases are coming and market participants expect the benchmark policy rate to rise to about 3.5 percent by the end of the year, a percentage point higher than today’s level.
The Fed chair emphasized that interest rate increases could bring down inflation without causing painful job losses or a sharp slowdown, but acknowledged again this week that the path to achieving that outcome “has clearly narrowed . . . and may narrow even further.”
He also emphasized that the central bank was still focused strictly on curbing high inflation and that failure to do so would be a worse outcome than restricting the economy excessively – raising fears about an eventual recession.
“That’s what happens in an environment where the Fed is trying to be restrictive,” said Andrew Patterson, Vanguard’s chief international economist. “You’re going to start to see shifts for the worse in production and an eventual increase in unemployment in an effort to bring down inflation.”