Economic system

The economic system would seem to like it in a recession, but we still have no idea what to say

In an aerial view, transport boxes slow down on the Port of Oakland on July 21, 2022 in Oakland, California. Truckers protesting California Assembly Bill 5 (AB5) effort legislation shut down operations at the Port of Oakland after blocking entrances to the port’s container terminals for the previous 4 days. An estimated 70,000 independent truckers in California are suffering from the state’s AB5 Act, a gig economy law passed in 2019 that made it difficult for companies to classify employees as independent contractors instead of staff. The port closure contributes to ongoing supply chain issues.

Justin Sullivan | Getty Images

The record second-quarter GDP brought the economic system into line with a not unusual definition of recession. But we may not know needless to say if it has been formally affirmed for at least months.

This is because the legitimate arbiter in these matters is the Business Cycle Dating Committee of the National Bureau of Economic Research, and it does not use the similar definition as the only usually allowed a minimum of two consecutive quarters of unfavorable widening.

Rather, the NBER defines recession as “a significant decline in economic activity that extends across the economy and lasts for more than a few months”.

This may involve consecutive quarters of decline. In truth, every time since 1948 that GDP has fallen for no less than two consecutive quarters, the NBER has finally declared a recession. Second quarter GDP fell 0.9%while the first quarter fell 1.6%, according to the Bureau of Economic Analysis.

But the bureau doesn’t even use GDP as an important factor in its thinking, and it declared a recession in 2001 with no consecutive declines.

And set yourself up for a wonder once again this time: there’s almost no top Wall Street economist expecting the NBER to mention that the US economy was in a recession all along. the first half of 2022.

“We weren’t in a recession in the first half, but there’s a good chance we will be by the end of the year,” said Mark Zandi, chief economist at Moody’s Analytics.

Like his cronies on the street, Zandi said the bustling jobs market – which, even with 457,000 jobs added per month this year, is still not at pre-Covid levels – is the main reason why the NBER might not claim a recession. But there are others.

“We have created too many jobs. We had a record number of layoffs, we had a record number of vacancies. Consumer spending and business investment have all been positive,” he said. “I just don’t see them declaring a recession.”

Federal Reserve Chairman Jerome Powell said Wednesday he doesn’t believe the economy is in a real recession, and he even questions the accuracy of the GDP information.

“What we have right now doesn’t look like” a recession, Powell said. “And the real reason is that the labor market just sends such a signal of economic strength that it really makes you question the GDP data.”

NBER standards

While the NBER is rarely a household title, the federal government and industry news retailers take the group’s proclamations as gospel when determining expansions and contractions.

The group generally has the idea of ​​using six elements:

  1. True private source of income minus switching bills
  2. Non-agricultural payroll
  3. Employment measured by Bureau of Labor Statistics Family Survey
  4. Actual Private Admission Spending
  5. Sales adjusted for fluctuations in value
  6. Industrial manufacturing

“If that definition sounds implied, that’s because it is,” Tim Quinlan, senior economist at Wells Fargo, said at a press conference last week. “Defining a recession is not easy and extends beyond the mere duration of a downturn to the depth and breadth of it across the economy as a whole.”

After Thursday’s GDP release, Quinlan mentioned that the prerequisites are quickly approaching even NBER standards.

“Insisting on the precise definition of recession will be an even more daunting task in light of the unequivocal deterioration in economic activity reflected in the current 0.9% contraction in real GDP in the second quarter,” he said. he writes. “Yet real consumer spending has continued to grow and the labor market still has legs. It’s too early to tell the end of this expansion, but the time is fast approaching.

Political ramifications

The question of the recession has become political.

Earlier this month, the White House raised some issues during the launch a blog set up insisting that the economic system is not in recession. Critics accused the management of seeking to trade a long-standing definition and the media of complying by noting the NBER issue.

The article noted that “holistic data” such as “the labor market, consumer and business spending, industrial production, and income” feature in the true definition of recession.

“Based on these data, the decline in GDP in the first quarter of this year, even if followed by another decline in GDP in the second quarter, is unlikely to indicate a recession,” the post said.

“Policymakers will no doubt get confused trying to explain why the US economy is not in recession. However, they make a strong point,” said Seema Shah, chief international strategist at Principal Global Investors. “While two consecutive quarters of negative growth is technically a recession, other more recent economic data is not consistent with a recession.”

Even though the NBER no longer claims a recession in the first 1/2, the economic system is far from out of the woods. Higher interest rateschronic inflation and a traditionally bitter temperament on the part of customers and businesses are the main risks going forward.

Many of those same economists who doubt a recession in the first half say that a recession is very conceivable in the next 12 months or so.

“People have a very negative feeling. It’s about as bleak as I’ve ever seen it,” said Moody’s economist Zandi. “I’ve never seen anything like it in terms of anticipating this bad economy that’s ahead. Ultimately, a recession is a loss of confidence. Consumers are losing confidence that they are going to have jobs, companies are losing confidence that they are going to be able to sell what they produce. The risks are very high, we are losing faith and entering a recession.