Everyone knows how his own personal economy is performing: expansion, contraction, stagnation. And everyone acts on the basis of his own microphenomena. Some people prospered during the Great Depression. One of my grandfathers never missed a paycheck, bought stock when the market was at its nadir, and accumulated a modest fortune. (My other grandfather’s experience was more Depression-like.) “Recession” is a term for what is perceived, through the fog of statistics, as some kind of average of individual economies.
If the government didn’t feel a responsibility for steering the direction of the “average economy”, labeling periods as “recessions” would be of interest only to historians. In the era of King Stork (we have forgotten that King Log ever reigned), though, labels inspire action. They also influence voters, even those whose personal economy isn’t much like what the label says.
The Biden Administration may not understand much, but it understands that. Therefore, it would very much like for the current economic climate not to be called a “recession” – at least not now. Hence, we have heard much about how the rule-of-thumb definition, two consecutive quarters of decline in the gross domestic product (generally expected to be met when the next GDP figures are announced), isn’t the real definition as formulated by the National Bureau of Economic Research, the accepted arbiter of U.S. business cycle history.
The NBER goes to some trouble to explain to the public what it means by a recession. Here is the grain of truth in Treasury Secretary Yellen’s insistence that the definition is “holistic”:
The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies. These include real personal income less transfers (PILT), nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, employment as measured by the household survey, and industrial production. There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions.
That’s a lot to evaluate, and the process takes time. Historically, the NBER has announced the beginning and the end of recessions with time lags ranging from as few as four to as many as 21 months. Perhaps the most consequential instance was the recession that began in July 1990 and ended in March 1991. The NBER announced the start date on April 25, 1991, and the end date on December 22, 1992. Throughout the 1992 Presidential campaign, Bill Clinton and the media trumpeted that the economy was in a slump. Clinton compared it to the Great Depression. That may be why he won. The Biden Administration is rather overtly hoping for the opposite: that it will be able to declare for months and months that there is no recession, because the NBER hasn’t yet said so.
When the NBER reaches its decision about the state of the business cycle as of July 2022, there is one factor that will not enter more than marginally, if at all, into its evaluation: the unemployment rate. In its judgment, “The unemployment rate is a trendless indicator that moves in the opposite direction from most other cyclical indicators.” Unemployment results from diminished economic activity, but it doesn’t coincide with the diminution. Businesses are slow to fire and slow to rehire. Hence, one cannot tell whether the economy is contracting or expanding today by looking at today’s unemployment rate. That is the product of what happened in the past.
Moreover, the current labor market doesn’t look all that robust.
Real average hourly earnings for all employees decreased 1.0 percent from May to June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from an increase of 0.3 percent in average hourly earnings combined with an increase of 1.3 percent in the Consumer Price Index for All Urban Consumers (CPI-U).
Real average weekly earnings decreased 1.0 percent over the month due to the change in real average hourly earnings combined with no change in the average workweek.
Real average hourly earnings decreased 3.6 percent, seasonally adjusted, from June 2021 to June 2022. The change in real average hourly earnings combined with a decrease of 0.9 percent in the average workweek resulted in a 4.4-percent decrease in real average weekly earnings over this period.
As Kevin D. Williamson puts it, “‘Americans are working more hours for less money’ is not a plausible definition of a strong job market.”
What about the two-quarter rule of thumb? Here is what the NBER says about it:
Most of the recessions identified by our procedures do consist of two or more consecutive quarters of declining real GDP, but not all of them. In 2001, for example, the recession did not include two consecutive quarters of decline in real GDP.
Hence, two consecutive quarters of decline are not necessary for a recession. Are they sufficient?
The NBER definition includes the phrase, “a significant decline in economic activity.” Thus real GDP could decline by relatively small amounts in two consecutive quarters without warranting the determination that a peak had occurred.
We’ll see when the data come out whether the first and second declines have been “by relatively small amounts”. Empirically, as economist Michael Strain observes,
Question: Out of the past 10 times the U.S. economy has experienced two consecutive quarters of negative economic growth, how many times was a recession officially declared?
Answer: 10
Addendum: The GDP shrinkage number is now out. It’s “only” a 0.9 percent decline, on top of the first quarter’s minus 1.6 percent. In its release reporting the data, the Bureau of Economic Analysis summarizes:
Real GDP decreased less in the second quarter than in the first quarter, decreasing 0.9 percent after decreasing 1.6 percent. The smaller decrease reflected an upturn in exports and a smaller decrease in federal government spending that were partly offset by larger declines in private inventory investment and state and local government spending, a slowdown in PCE [personal consumption expenditures], and downturns in nonresidential fixed investment and residential fixed investment. Imports decelerated.
That’s not 1929, but it’s definitely contraction. The factors that limited the decrease (exports and a “decrease” in federal spending that the BEA attributes to sales from the Strategic Petroleum Reserve, which are counted as offsets to spending rather than increases in revenue) are likely to be transient, while inflation will aggravate the recessionary factors. With real incomes declining, personal consumption, business investment and home buying are in for rocky times.
You can read about the White House spin here.
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