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The Recession that Wasn’t (Or Isn’t Yet)

July 29, 2022 – On Thursday, the United States Department of Commerce released one of the most of the most anticipated government reports: GDP results for the second quarter. Discussion around Q2 GDP has been intense since the first quarter GDP was reported as shrinking 1.2% from Q1 2021. With one negative quarter of GPD, the economy seemed halfway to the point of recession, which has been commonly understood to be two consecutive quarters of declining GDP. Well, as the data were released on Thursday morning, it became clear that the US economy did shrink in Q2, calculated to be a decline of 0.9%; but no declaration of recession emerged.

On Thursday’s show, Prof. Jason Miller of Michigan State University clarified the issue, noting that the official business cycle declarations are made by the National Bureau of Economic Research, a non-partisan, non-profit think tank that has been contracted by the Department of Commerce since the 1960s to officially name the beginning and end dates of recessions. Their longstanding definition of recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”. Ordinarily, as a single economic quarter is 3 months long, two consecutive quarters of GDP decline is a long enough period to determine whether or not it is in fact a recession. The Bureau has kept such an ambiguous definition because they are subjectively assessing how three criteria of recession are measured: depth (of the decline or slowdown), diffusion (how widely spread are the negative impacts), and duration (how long has the activity been slowing); and they weight that against their own experience. For more detail from the NBER on how the process works, here’s the FAQ

So why isn’t this a recession?  Because while the economy has been slowing for almost 6 months, and higher prices have been very widely diffused throughout the economy, there have been few reports to suggest that the pain is very deep – yet, anyway. In fact, several important measures of economic health are still showing signs of underlying strength, even if the current trend is down.

Professor Miller highlighted some important data points, such as expenditures for Personal Consumption of Goods; while it was down 1.1% from the first quarter of this year, spending remains nearly 5% higher than Q4 2019, the last one unimpacted by the pandemic. Even though consumers do seem to be reacting to the higher prices in the stores, the overall level of consumer spending remains intensely elevated. And a similar trend is visible in Private Residential Investment, which saw a decline in Q2 as the housing market has cooled, but still remains 11.2% higher than 2019.

And indeed, the unemployment rate continues to hover near record lows, and earlier on Friday, both Exxon and Chevron reported the most profitable quarter for either company ever in their history. All of these conflicting data points were the reason NBER has refrained from calling this a recession as of right now.

The trends are certainly troubling, with headline inflation still at 9.1%, the Federal Reserve actively raising interest rates at the most aggressive pace in decades, and starkly higher food and energy costs around the globe, a recession seems probable; but the underlying data just don’t bear it out. Yet.

  • Mike Pearson

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