The American Economy decreased at an annual rate of 0.9% from April to June, the Bureau of Economic Analysis estimated on July 28, 2022. It follows a contraction in gross domestic product of 1.6% recorded in the first quarter of the year.
Some observers suggest that the two trimesters of contraction constitute a “technical recession” or the “unofficial start” of awhile others suggest at least it’s scary Where signal that he is on his way. Federal Reserve Chairman Jerome Powell apparently thinks otherwise. July 27after raise interest rates 0.75 percentage points, Powell told reporters, “it’s a strong economy and there’s no indication that it’s near or vulnerable to a recession.”
Not sure if the United States is in a recession or how to know when we’re hitting? If you are, join the club.
So The Conversation US asked Brian Whitefinancial economist at Mississippi State University, to explain what is happening in the economy and what factors determine whether it is in a recession.
What did the latest GDP report tell us?
The economy is really hard to pin down right now.
First, the issue everyone is talking about now is the release of the less than impressive gross domestic product report, which showed a contraction after adjusting for inflation.
Some aspects of the report were positive, such as the fact that consumption – how much people buy – increased a little further and that business fixed investment – how much companies spend on machinery and factories – remained stable, avoiding the previously predicted drop.
Turning to some of the more negative news, investment in residential housing and real estate fell 14%, which makes sense given its increase since the pandemic upended the housing market. Additionally, a decline in investment in private inventory — a measure of how much stuff companies have produced but haven’t yet sold — has perhaps the biggest impact on the negative second-quarter numbers. While the inventory reductions may be a sign of strength in product sales, the decline has reduced overall GDP by more than 2 percentage points.
And overall, that means the U.S. economy has technically contracted for two straight quarters, which is why you’re seeing a lot more economists, journalists, and others using the dreaded “R” word: recession.
What is a recession, anyway?
Two consecutive quarters of contraction is the shorthand that journalists and many others use to describe a recession.
In the United States, however, the economy is only considered officially in recession after the National Bureau of Economic Research, a nonprofit and nonpartisan organization, declares it.
The bureau defines a recession as a “significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.” Its Business Cycle Dating Committee, made up of eight economics professors, meets to determine when recessions begin and end. It uses three key criteria:
1) How fast the economy is shrinking.
2) How many aspects of the economy are in decline.
3) How long the economy is contracting.
The NBER defines recessions as the time between the point at which the economy stops growing – the peak – and the point at which it starts to grow again – the trough.
So, are we in a recession or not?
Recessions are complicated to identify, since the economy is large and has many parts. Currently, some parts of the US economy, like the labor market, are growing rapidly, while others, like housing, are slowing.
Although two quarters of economic contraction usually coincide with a recession, they also don’t usually imply the strong job growth the US economy has seen this year. And recessions rarely happen when unemployment – which is currently at about a half-century low of 3.6% – is falling. The economy is generally not in a recession so almost everyone who wants a job has one.
Also, recessions usually involve a decline in real gross domestic income, which is similar to GDP but rather specifically measures income and costs related to production. In theory, they should move more or less in tandem, but gross domestic income continues to grow.
Another measure of growth is personal income, which rose for most of the year and rose faster than spending in May. The Fed is watching this metric closely because of its predictive ability, as is the National Bureau of Economic Research, in addition to unemployment.
For my 2 cents, I think Powell is right. The economy does not appear to be in recession at the moment, given the strength of the labor market. With 2.7 million more people employed today than at the end of last year, a key measure of the economy continues to grow.
“There are too many sectors of the economy that are working too well,” Powell told reporters. “It doesn’t make sense for the economy to be in a recession with this kind of thing going on.”
That said, Powell and the Fed are doing their best to rein in soaring inflation by slowing the economy – and there are fears that this could trigger a recession. If you want a strong signal as to whether this might happen, look at residential investment as a percentage of GDP. Residential investment is the amount individuals spend on new homes and home improvements. Right now it’s stable, but when it starts to decline, a recession is usually on its heels.
Keep in mind that 2021 had one of its best US economies in decades, so maybe Americans can accept an average 2022. In some ways, an economy that’s not growing too fast could also mean an economy that’s got inflation under control, suggesting that sometimes bad news is actually good news.
D. Brian Blank is assistant professor of finance at Mississippi State University
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