Hey Siri, What is a Recession?
No one seems to agree on what the definition of recession is right now, let alone if we’re presently in one. These are words I never thought I’d have to write and yet the current debate is so intense Wikipedia has actually blocked new users from editing its recession page because people kept changing the definition. So what is (or are) the definition(s)?
Most (including Siri) define a recession as two consecutive quarters of negative Gross Domestic Product growth, regardless of what other indicators say about the economy. This is because GDP is the broadest measure of the economy and encompasses the total level of goods and services produced during the period. If you follow this commonly held rule-of-thumb, we’ve already met the criteria.
Others believe that it’s not officially a recession until the non-profit National Bureau of Economic Research (NBER), which certifies and dates U.S. business cycles, says it is. This is where things get complicated.
The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The words ‘significant’ and ‘more than a few’ are subjective though, and the NBER themselves admit “there is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions.”
Because of this, it can take the committee of economists months or even years to determine a business-cycle peak or trough, and they often wait long after a recession has begun to make their final call.
Those who adhere to the first, more popular definition received their answer late last month, when the U.S. Bureau of Economic Analysis released their July 28 report showing our nation’s gross domestic product fell another 0.9% in the second quarter, following a 1.6% decline in the first. Yet, despite two straight GDP contractions over a six month period, public debate over the current state of our economy continues to be marked with contentious disagreement.
For example, people were quick to accuse the recession Wikipedia page of trying to erase that popular definition to align itself with President Biden who, shortly after GDP data was released, rejected the idea that the U.S. is in a recession. Instead, he touted continued job growth, low unemployment and growing investment from manufacturers. “That doesn’t sound like a recession to me,” he said.
It’s true, there is no historical precedent to indicate that an economy in recession can produce 528,000 jobs in a month, as the U.S. did during July. The truth is, however, the economy is not as healthy as the White House would like you to believe.
For starters, we’ve only just returned to our pre-pandemic peak employment levels and that’s despite the working-age population increasing by around 2 million over the same period of time. The economy would have to grow for several more quarters to make up for the lost economic momentum over the last two and a half years.
Our unemployment rate reached its pre-pandemic low of 3.5%, however, our labor force participation still remains considerably below its pre-pandemic level of 63.4%. This skews the low unemployment rate because, you guessed it, less people are searching for jobs.
Wages rose 5.2%, year over year, in July, however, wage growth remained well below the annual inflation rate of 9.1% for that same month, indicating a decline in real wages and a further loss of consumer purchasing power.
Not surprisingly, consumer confidence also declined for the third-straight month as Americans grew even more pessimistic about the US economy. Personal consumption, which accounts for the majority of the economy, grew at a measly 1% pace in Q2 and the once-booming housing market has entered a downturn.
The largest threat, however, is the near impossibility that the Federal Reserve will be able to successfully combat inflation without actually causing a recession themselves. Despite two consecutive interest rate hikes — totaling 1.5 percentage points between March and June — both the June and July consumer price index readings hovered around a 40-year high. Why? Because the Federal Reserve was in denial when inflation first started to accelerate in 2021, calling historic price hikes “transitory” instead of responsibly raising interest rates when they should have.
Instead of learning from this mistake, it seems we’ll be caught similarly flat footed because our leaders are too caught up in an academic debate over the technical definition of a recession rather than promoting economic policies to help us avoid one.
The bottom line is this: Americans facing soaring prices for food, fuel, and housing do not need an elite group of economists to tell them that the economy is bad right now.
Look no further than a recent Monmouth poll in which the number of people who say they are struggling has increased by 18 points since last year (from 24% to 42%), with that increase being fairly across the board when examining key demographic groups, including income, race, and partisanship.
Perhaps it was one of them who recently took to the internet to quip, “It’s only a recession if it is from the Recession region of France. Otherwise, it’s just sparkling misery.”