Are We in A Recession?

The truth is, we don’t know. But let’s be clear: whether we are or not doesn’t depend on the 2nd quarter GDP report. Though two consecutive quarters of declining GDP is often cited as the definition of a recession, it’s not the definition economists use. And with good reason.

Instead, the NBER Business Cycle Dating Committee uses this definition: “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” And they explain why GDP is not their preferred measure, which includes several reasons but this one seems most germane to our current moment: “[the] definition includes the phrase, ‘a significant decline in economic activity.’ Thus real GDP could decline by relatively small amounts in two consecutive quarters without warranting the determination that a peak had occurred.”

If not GDP, what do they look at? I’ll get into more detail later, but in short, they look at monthly measures of income, consumption, employment, sales, and production (a direct measure of production, which GDP is not — it’s a proxy).

However, the American public seems convinced that we are in a recession. The most recent poll I can find on this is from mid-June, which is useful because (as we’ll see below) we have most of the relevant measures of the economy for June 2022 already. In that poll, 56% of Americans say we are in a recession. And while there is some partisan bent to the responses, even 45% of Democrats seem to think we are in a recession. For those that say we are in a recession, 2/3 cite inflation as the primary indicator that we are in a recession.

Already here we can see the difference between the general public and NBER: the rate of inflation is not one of the measures that NBER considers when defining a recession. So, what are the measures they use?

Here are the 6 monthly measures that the NBER Committee currently considers as most important. Here come the charts! For each of these I’ve started the series in 2007, so you can see what other recessions looked like (typo in earlier version: I had said there were 7 measures, and I repeated one of the charts twice).

I’m not going to go into details on each of these 6 graphs, but at least for the most recent data (which isn’t June for all of these, but it is for some), we aren’t clearly seeing the kinds of declines that we saw in late 2007/early 2008 (nor in 2020, but that was a weird one). A few of these have shown slight ticks downward for a month or two, such as Industrial Production in June, but nothing like we saw in past recessions.

Also, on inflation, all of the measures in these charts are essentially adjusted for inflation, except for the employment measures. Three of them are directly adjusted with some price index, and Industrial Production is a volume index so it’s implicitly adjusted for inflation.

But of course, the Business Cycle Committee isn’t trying to date downturns in real time. They are trying to use a consistent historical definition and apply it to each potential economic downturn. Right now though, based on the standard measures, there isn’t much evidence that the economy was in recession in June, though certainly June could end up being the peak month if the measures turn down in July. But this does mean that a recession starting in the 2nd quarter of 2022 is unlikely (regardless of what the GDP data show), though it could also be the peak, with decline starting in the 3rd quarter.

Finally, let’s ask an important question: should we care? Does it matter if we are “technically” in a recession? Aren’t people feeling economic pain?

Yes, we should care. First, let’s be clear that just because the economic is expanding it doesn’t mean that everything is going great. For example, while people are starting to refer to the stagflation of the 1970s a lot lately, much of the 1970s was characterized by high inflation with real economic growth. You can have both at the same time! It’s especially troubling when prices are increasing faster than wages, but this is an economic problem distinct from a recession (though one measure NBER uses, real personal income, does take a form of this measure into account).

Or to take another important concept, it’s possible that inequality could be increasing at the same time that the economy is expanding. That’s a problem, but not a recession. Just because the economy is expanding doesn’t mean we live in the best of all worlds.

And whether we are in a recession matters for a very important reason: economic policy. If we are indeed in a recession and experiencing high inflation, that makes the job of the Fed even more difficult! At least if the economy is expanding while we experience inflation, the Fed knows the direction they should push. Under stagflation, monetary policy is really, really, really hard (as opposed to just really, really hard). Ditto fiscal policy. Of course, the Fed isn’t waiting for the NBER Committee’s pronouncement to act! But they are essentially trying to make the same call in real time (which again, to stress, is really, really, really hard).

Once we have data on all these 6 measures through July 2022, we can perhaps be more confident about whether or not a recession began (or was already happening) in June 2022. That data will take a few more months to collect and analyze.

But you can be sure the economists will be watching. But one or two measures going down for one or two months isn’t what we mean be a recession. Notice in the charts above many times when a single measure was declining. For example, Industrial Production was fall for much of 2014 and 2015, and then again in (less dramatically) in 2018 and 2019! But it wasn’t declining simultaneously with the other measures. To be a recession (in both the “technical” and policy-relevant sense), economists are looking for sustained declines across most of these measures of the economy.

3 thoughts on “Are We in A Recession?

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