Doctor, is it a recession?

According to the Commerce Department, America’s GDP fell 1.6% in the first quarter (Jan-Mar) of 2022 and then another 0.9% in the second quarter (seasonally adjusted annual rates). Two consecutive quarters of GDP shrinkage puts us in what is known as a recession. Or does it? Even before the 2nd number hit, the Biden administration had begun arguing that this was not really a recession. From the White House:

Their attempts to deny the existence of an economic slump received a lot of ridicule from partisans on the right, as would be expected. (If you’re out of power, you want the country to be doing terribly so you can “fix” it. This is called patriotism.) Except perhaps the Biden folks are right. Or at least, it’s not as simple as it first seems.

We all agree that a recession is an economic slump but how much of a slump? It turns out there really is no universally agreed-upon definition of a recession.

The most common definition describes a “technical recession,” even though it’s not very technical. GDP declined two quarters in a row? You’re in a technical recession! Take some increased consumer spending and see me in the morning. Except this definition is quite arbitrary. The GDP is a single number that represents only one aspect of a country’s economy (the total value of goods and services produced). Unemployment, for example, also matters. A country with 12% unemployment might have the same GDP as one with 5%, but their economies are probably not equally healthy. The Biden camp is correct in pointing out that the U.S. economy involves trillions of moving parts and the idea that one number completely describes it is nonsense.

Technical recessions are also chronologically arbitrary. Why just look at quarters? Imagine an economic slump that goes from December through April. Five months of slumping GDP seems like a recession but most of the slump took place in Q1 and only a month in Q4 of the previous year and another month in Q2 of this year. Only one full quarter of slump? No recession! But make those five months January through May and suddenly, voila, we have a recession.

This is why many prefer the definition decided by the National Bureau of Economic Research (NBER), a private nonprofit organization (although they receive government funding). As the White House says, NBER looks at a number of economic indicators, not just GDP.

NBER looks at a broad range of factors and has no one formula for determining what counts as a recession. NBER also looks at the economy by month, not by quarter, and so its analysis is more granular. Calling them “official,” though, is a stretch. August Bayard over at The Dispatch contacted a spokesman for NBER who said “The NBER makes no claim to being the ‘official’ determiner of recession and expansion dates.” It’s just become normal in the U.S. to see NBER’s evaluation as definitive. (The final call at NBER is made by the Business Cycle Dating Committee, which consists of eight heavy-hitter economists, all holding day jobs at top-tier universities. I hear they also play a mean game of pickleball.)

NBER has not announced a recession and is unlikely to do so anytime soon. This is because NBER always waits until more data comes in before making its evaluation.

It actually looks at a wide variety of economic indicators to make that designation. They look at employment, personal income, durable goods, housing permits — so the GDP is certainly part of it, but they’re looking at other indicators, as well.

Said Alex Durante, an economist at the Tax Foundation, to The Hill.

This is obviously difficult for policymakers who want to stay on top of these conversations, but usually, NBER doesn’t make the designation until after a year. That’s because they want to make sure they have enough data, but also because the data tends to be revised.

We could have been in an “official” recession for many months before NBER will call it. No wonder Biden prefers them! They’re the doctor who will tell you what disease you had nine months after you’ve gotten better. The NBER definition is probably more accurate but not very useful for figuring out what’s happening right now. This makes the Biden administration’s claim that it’s the only definition that counts a bit disingenuous.

That there is some kind of slump is clear. Here is Jason Furman, an economist at Harvard (but not a member of the BCDC), illustrating how the GDP has dropped. The orange line is what the Congressional Budget Office predicted in January 2020 (pre-pandemic); the blue line is what’s actually happened. We’ve had an amazing recovery but our economy still hasn’t fully caught up and recently it took a ding.

Jason Furman @jasonfurman

Here is the big picture on GDP growth: in Q4 it was closing in on CBO's pre-pandemic forecast. But it has since fallen back and is 2.2% below now. But remember an alternative measure, GDI, is much stronger through Q1 (and not available yet for Q2).

Ok, so we’re in a recession, right?

Noah Smith (another economist who’s also a very popular Substacker) says yes, but also that the fight over the label is political rather than economic.

Of course the big debate in the media will be over whether we’re now in a recession. The reason people argue over this isn’t really economics; it’s politics. “Recession” is a scary word, especially for those who remember 2008-12 — It conjures up images of unemployment insurance lines and dejected hopeless workers sitting around at home reading the classified ads. Because recessions are thought to equal political death for the governing party, supporters of that party tend not to want to admit that we’re currently in one, while opponents of that party tend to yell that we are in one. In this case, that means Biden supporters will mostly be trying to avoid the use of the r-word, while Republicans will be using it a lot.

If you want Democrats to win in 2022 and 2024, it’s important to downplay the recession. If you want Republicans to triumph, it’s all recession all the time. As a Democrat, I’m probably inclined towards Team Downplay, but I’m not the best Democrat and I’m a bigger fan of Team Truth. The truth is, we’re in a recession.

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(Fun side-note: The hyper-partisan nature of Just About Everything™ led to an editing war on Wikipedia’s page for “recession.” James Billot reported for Unherd that “up until July 27, users were making significant changes to the definition of recession with any mention of two consecutive quarters of negative growth scrubbed from the page.” I picture frenzied armies of partisans, furiously deleting and redeleting each other’s edits. Sam in Hattiesburg types “Two negative quarters make a recession, Brandon!” Then Kim in Berkeley replaces Sam with “A two negative quarter definition is fascism!” Things seem to have settled down and the ‘two quarters’ definition is firmly back in place. NPR reports that “New and unregistered users are no longer allowed to edit the page, which is currently "semi-protected" until Aug. 3, according to Wikipedia.”)

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The real problem, argues Noah Smith, is not recession, but inflation. In fact, our current mild recession is happening because the Federal Reserve has hiked interest rates in order to slow the economy and reduce inflation. Higher Fed rates (they’re at a range of 2.25% to 2.50% now and likely to rise) are reducing investment, and this helps create a recession. It’s like the fever you get when you’re sick. It’s not fun but it’s how your body fights the disease. Putting the breaks on an overheated economy is how the government fights inflation, and that’s gonna result in a recession.

If this recession is mild, and doesn’t put too many folks out of work, but does curb inflation, it’ll be fine. Recessions are a normal part of the business cycle. This is the tone I’m getting from all the experts I read so I’m not worried. Yet.

(1948-2022. The blue line is unemployment. Shaded bars mark recessions.)