Do the Recent GDP Numbers Mean We Are in a Recession?

August 1, 2022

The U.S. economy contracted by 0.9% in the second quarter, following a 1.6% decline in the first quarter. GDP has contracted for the past two consecutive quarters, which, according to the commonly accepted definition of the term, means the economy has entered a recession.

However, it may be months before an official recession is declared. The official arbiter of recessions is the National Bureau of Economic Research (NBER), and it defines a recession differently.
According to the NEBR, a recession is “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

This does frequently mean two consecutive quarters of decline. In fact, since 1984, every time that GDP has fallen for two quarters, the NEBR has ultimately declared a recession. However, the NEBR does not even use GDP as a major factor in its decision. Instead, it looks at a variety of factors like real income, employment, personal consumption, and industrial production. That’s why the NEBR declared a recession in 2001, despite there not being two consecutive quarters of decline.

Most Wall Street economists think that the first half of 2022 will also be a historical outlier and that there is little chance that we are in a recession. The primary reason is the robust labor market. Since the year began, the economy has added 457,000 jobs per month, the unemployment rate is near a 50-year low, and layoffs have been near record lows. None of which suggests the economy is in the midst of a recession.

Federal Reserve Chairman Jerome Powell has said he also does not think the economy was in a true recession and even questioned the accuracy of the GDP data.

Powell contended that the current state of the economy “doesn’t seem like” a recession, adding that “the labor market is just sending such a signal of economic strength that it makes you really question the GDP data.”

Regardless of whether or not the NBER ultimately declares a recession in the first half of the year, it is clear that the economy is losing momentum. Soaring inflation, higher interest rates, and historically low levels of consumer sentiment suggest that there are many headwinds ahead, and many of the same economists who are skeptical that we have already entered a recession warn that the risk of one is very high over the next year or so.

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