Here’s how to tell if we’re in a recession, and it’s not what you think

People shop at a supermarket as inflation hits consumer prices in New York City on June 10, 2022.

andrew kelly | Reuters

Everyone who cares knows that recessions happen when there are two consecutive quarters of negative growth – everyone but those who actually decide when the economy is in a recession.

For these folks at the National Bureau of Economic Research, the definition of recession is much more spongy.

Officially, the NBER defines a recession as “a significant decline in economic activity that extends throughout the economy and lasts for more than a few months.” The bureau’s economists, in fact, even profess not to use gross domestic product, the broadest measure of activity, as their primary barometer.

That’s important, because data out on Thursday could indicate that the United States experienced its second consecutive period of negative growth in the second quarter. Even if every period since 1948 of two consecutive negative quarters has coincided with a recession, it may not happen this time.

Why? It is complicated.

“The NBER would be a laughing stock if it said we had a recession when we were creating 400,000 jobs a month,” said Dean Baker, co-founder of the Center for Economic and Policy Research. “I can’t even imagine they would think for a second that we’re in a recession.”

Indeed, nonfarm payrolls grew by an average of 457,000 per month in the first six months of the year, barely the conditions associated with an economic downturn. Additionally, there are 11.3 million job openings and only 5.9 million workers available to fill them, indicating that hiring should remain strong.

The case of the recession

But there were also downsides.

Dollar-level consumer spending has been strong, but when adjusted for a 40-year high for inflation, it has been much less so. The US trade deficit hit a record high in March, another negative for GDP. Inventories have lagged, which is also hurting growth as measured by the Bureau of Economic Analysis.

For the public, however, these are just details left to economists. If the second quarter GDP number is negative and reporters and the White House don’t call it a recession, it’s sure to confuse and possibly anger those affected by the surge in the economy. inflation and a sharp slowdown in some aspects of the economy.

After all, there are many things that make it feel like a recession: sky-high prices, widespread product shortages, and warnings from companies like Walmart that profits are shrinking due to changing consumer habits, to name just three.

The first quarter saw GDP contract by 1.6% and the Atlanta Federal Reserve’s real-time tracker shows the same decline for the second quarter.

“I think it’s just a game of semantics. The trajectory of the economy is much lower, whether you define it as [a recession] or not,” said Peter Boockvar, Chief Investment Officer of Bleakley Advisory Group. “On the contrary, the third quarter will show further weakness. So you could have three consecutive quarters of GDP contraction. Does that technically mean we’re in a recession?”

The criterion

For its part, the NBER, based in Cambridge, Mass., is a somewhat obscure group, meeting in private and generally not making recession calls months after they start, and sometimes long after they end. His most recent call came from the Covid downturn, which he says began in February 2020 and ended two months later.

Yet the government and most business news outlets take NBER rulings as gospel when determining expansions and contractions.

The organization is generally believed to use six factors: actual personal income less transfer payments, non-farm payrolls, employment as measured by the Bureau of Labor Statistics household survey, actual personal consumption expenditure , sales adjusted for price fluctuations and industrial production. The NBER did not respond to a CNBC request for comment.

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

Quinlan said the data points can be broken down into four major groups: production, revenue, employment and expenses.

“The economy has never been in a recession when at least three NBER indicators rose during the month,” he said. “While we don’t yet have any real sales through May, non-farm payrolls, real personal income less transfers and industrial production all rose during the month, suggesting the economy is not not yet in recession.”

If the NBER doesn’t call a recession anytime soon, the next question will be what will happen.

Boockvar sees a recession as inevitable, with the NBER’s statement just a matter of timing. “I wouldn’t be surprised if their recession start date was a bit later,” he said.

Like many others, Baker worries that the Federal Reserve’s interest rate hikes aimed at controlling inflation and slowing the economy could overdo it and cause a downturn to come.

But it is certain that the conditions of the first half of the year do not indicate a recession.

“Were we in a recession in the first half? It doesn’t make sense,” Baker said. “The NBER folks, I respect them as serious economists. There’s no way they’re saying this is the recession.”

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