In the first quarter, U.S. gross domestic product fell at an annual rate of 1.6 percent. Newly released numbers indicated that GDP decreased in the second quarter as well, this time at an annual rate of 0.9 percent.
Many commentators consider two consecutive quarters of negative GDP growth a recession. But it turns out that at a granular level no one really agrees on what exactly makes a recession different from economic normalcy.
The National Bureau of Economic Research is the official determiner of whether or not we’re in a recession. Eight NBER economists get together, look at a lot of data (including but certainly not limited to GDP patterns), and decide if we’re in a recession.
This organization may be nonprofit and nonpartisan, and surely utilizes highly trained experts. Yet, at the end of the day, it’s just eight people considering whether or not they feel like we’re in a recession.
That’s almost as arbitrary at nine former lawyers feeling their way through whether 330 million of the rest of us should have access to abortion (or guns, or democracy).
Biden administration officials sure don’t think we’re in a recession yet. “When you’re creating almost 400,000 jobs a month, that is not a recession,” Treasury Secretary Janet Yellen said during her recent appearance on NBC’s Meet the Press.
There’s a lot more than just sustained, robust job growth to demonstrate the ongoing strength of the U.S. economy.
Median wages continue to climb steadily upward, especially for younger workers and workers willing to switch jobs for higher pay. Inflation has blunted some of those wage gains for some workers, but real wage gains have easily trumped inflation for a good number of workers.
Now Congress is finally getting on board (along with the Fed) in at least attempting to implement policy measures to help curb inflation. Corporate profits remain strong, with about 78 percent of earnings reports beating Wall Street expectation — well above the long-term average.
“Being in a recession” seems to be used colloquially as shorthand for “many more people than normal feeling a lot of economic pain.” Charactered that way, if we are in a recession, it’s a highly technical distinction.
If we are in a recession — one where there are nearly two job openings for every person looking for work, where wages are rising rapidly, and where corporate profits remain high — who really cares?
The two-quarter decline in GDP may actually indicate that the Fed’s plan is working. The Federal Reserve has been waging an aggressive war against inflation this year, raising its benchmark interest rate four times so far for a total of 2.25 percentage points. At least a couple more rate hikes are seen as likely before year’s end. The whole idea of these rate increases is to slow the economy, and the decline in GDP shows they are kicking in.
In an ideal world, of course, the Fed could still achieve its aspirational soft landing: reigning in inflation without plunging the U.S. into a severe recession. Despite a lot of anxiety, and a lot of criticism, it seems the Fed is doing exactly what it’s supposed to be doing. Americans’ top concern right now is not employment, the business climate, or GDP. It’s inflation, which is exactly what the Fed’s rate hikes are targeting.
Interest rate hikes are meant to sacrifice things like job growth and GDP in the name of fighting inflation. At this point, people are still complaining about inflation and are not particularly worried about ample employment opportunities or esoteric economic indicators. Which means that the Fed hasn’t irreparably damaged the broader economy, and that whether eight economists think we in a recession is not highly useful information at the moment.
Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at firstname.lastname@example.org.