The GDP report shows a declining economy. Are we in a recession?

The debate about whether we are in a recession has officially begun.

The Commerce Department reported Thursday morning that gross domestic product, an economic measure of growth in the U.S. economy, has shrunk for two straight quarters. GDP fell 0.9% on an annualized basis in April, May and June, and 1.6% in the first three months of the year.

Consumer spending actually rose in the second quarter, according to the Commerce Department, while the drop in GDP was due to lower government spending and lower investment in residential and non-residential buildings, as well as lower inventory investment for businesses.

The reason this report – one of the most anticipated of the year – is so important is that two consecutive quarters of GDP contraction are usually a sign that we are in a recession. But this report does not mean that we are in one.

Right now, the Federal Reserve is actively trying to slow down the economy by steadily raising interest rates. It signaled another 0.75% rise on Thursday, with Federal Reserve Chairman Jerome Powell saying at his press conference, “I don’t think the United States is in a recession right now,” while ” the labor market is extremely tight and inflation is far too high.” .”

Whether we are in a recession is not necessarily an easy decision. If we’re debating whether we’re in a recession, that’s a sign that we’re not – at least not yet.

Look under the hood: what does this GDP report say?

The otherwise obscure “change in private stocks” is particularly examined. It measures the amount that companies add to their product inventories to sell or manufacture products. This notoriously volatile metric has fallen due to companies getting caught up in the supply chain crisis, desperately trying to build up inventory to meet growing demand for goods and are now struggling to the other side with so many things that some retailers tell customers to keep returned goods.

According to the Commerce Department, inventory additions by retailers and auto dealers were much lower than in the previous quarter. This change in private inventories alone reduced GDP growth by 2 percentage points in the second quarter.

There has also been a significant slowdown in some of the otherwise positive components of GDP. Growth in personal consumption, which is generally the engine of the economy, fell from 1.8% in the first quarter to 1% in the second quarter. But even here, the total number covers a more complicated story. Consumption of goods, after surging in the second half of 2020 and 2021, fell by almost 5% while consumption of services increased by just over 4%.

Does this mean we are in a recession? Not enough.

But is it a recession? While a common shortcut – and the official definition – in some countries is that a recession occurs whenever there are two consecutive quarters of declining GDP, this is not the case in the United States.

Instead, a committee of economists, convened by the nonprofit National Bureau of Economic Research (NBER), declares the month when the economy peaked (and a recession began) and when it peaked. bottoms out (when the recession is over) looking at a series of economic data, of which the GDP figures are only one component. These statements usually come several months after the respective turning points.

At the same time that the economy is contracting based on GDP, different measures used by the NBER and other economists tell a more mixed story. Employment continues to rise and industrial production is stable, while some measures of consumption and retail sales have been affected by high inflation.

Whether we are in a recession becomes a political debate

In any case, the White House, which pointed to overall economic strength and job growth contrasted with high inflation, asserted that the economy was not in recession despite expectations of a second negative quarter of GDP. It is not unusual for White Houses to push back on claims that they are in a recession – as recently as July 2008, George W. Bush told the media: “I’m not an economist, but I believe we let’s grow” (in December, the NBER would report that the recession had actually started a year earlier).

Over the weekend, Treasury Secretary Janet Yellen said: ‘This is not an economy in recession’, rather that ‘the economy is slowing down’ and ‘we are in a transition period in which growth slows down”. And it’s necessary and appropriate, and we need to grow steadily and sustainably.

Brian Deese, the director of the National Economic Council, said at a White House press briefing on Tuesday that “two negative quarters of GDP growth is not the technical definition of a recession. It is not the definition on which economists have traditionally relied.

This recession definition question has predictably turned into a political headache for the White House, with a Fox News reporter tweeting that the White House is “redefining what a recession is” in response to a blog post from the Council of Economic Advisers outlining the process of dating and defining recession.

While the question of whether we’re technically in a recession will be catnip for economists, journalists, policy consultants and advertisers, what people and businesses think about the economy — and how they plan to saving, spending and investing – is probably far more sensitive to what they are actually going through, or even just how they are feeling.

Thanks to Lillian Barkley for writing this article.

Amanda J. Marsh