Recession Or Not?
August 5, 2022
Last week we got the Q2 GDP numbers and the Bureau of Economic Analysis (BEA) confirmed that GDP has now declined for two consecutive quarters. What do I make of that? Are we in a recession now? Since several people asked me to comment on this issue, here are my thoughts…
In the United States, we use two different competing definitions of a recession:
- We’re in a recession if an independent panel of famous economics professors associated with the National Bureau of Economic Research (NBER) decides so.
- We’re in a recession if we experience two consecutive quarters of GDP declines.
Both definitions have their pros and cons. In academic circles, you’ll find more support for the first one. In Wall Street circles, most people follow the second one. And in political circles, people follow the definition that best suits their current needs, i.e., Democrats currently point out that because the NBER hasn’t called a recession, we can’t possibly be in a recession right now (false, because economic turning points are always backdated), while Republicans insist that the second definition is the only one we’ve ever used (also false).
The advantage of the 2-quarter negative growth definition is that you avoid the long delays when confirming the business cycle turning points. The first GDP estimates come out about four weeks after the end of the quarter (though they’d be subject to further revision). The simple two-quarter GDP definition is thus more useful for practitioners, i.e., folks on Wall Street. Academics, on the other hand, can be more “academic”; they can afford to wait a year or two to guarantee certainty about the business cycle turning points. As someone who’s worked in both academic and Wall Street circles, I can tell you that clocks run a bit slower in academia. I once submitted a paper to a journal in 2001 and it was published in 2006. Wall Street wants to move a bit quicker than that!
Waiting for the NBER to make their decision can be frustrating. Take, for example, the 2001 recession. The NBER didn’t announce the March 2001 recession start until November 2001. The timing is ironic because that month turned out to be the end of the recession. That’s like a pregnancy test where the result is available after the baby is born. And the November 2001 end of the recession wasn’t confirmed by the NBER until 2003. So, anyone who argued in the Summer of 2001 that there is no recession because the NBER hadn’t announced one yet, was wrong!
The 2001 recession was special in another way: That recession didn’t even satisfy the second criterion. In 2001, the first and third quarter GDP growth was negative, but the second quarter GDP number was ever so slightly positive. The same pattern, negative-positive-negative growth quarters, also occurred during the 1960-1961 recession. Also notice that the pandemic recession spanned only two months: March and April 2020. Just by dumb luck, the 2020 recession spanned two quarters and indeed produced the “magical” two consecutive quarters. Had the 2020 recession occurred just one month earlier or one month later, then the two recession months would have fallen into the same quarter. And we would have observed only one quarter of negative GDP growth, again falling short of the two consecutive quarters of decline criterion.
So, the two-consecutive quarters of negative GDP growth is certainly not a necessary condition for the NBER to eventually declare a recession. But is the second criterion a sufficient condition for the NBER to declare a recession? At least in recent history, there hasn’t been any 2-quarter contraction outside of an NBER recession.
In the rest of the post, let me try to look for indicators to support the two sides of the “recession or not” argument:
The case against a recession
First, for a recession, the labor market is still too strong. Normally, we see an increase in the unemployment rate and a decline in payroll employment. This morning (August 5, 2022) we just got another Nonfarm Payroll Employment release from the Bureau of Labor Statistics (BLS), and payrolls grew by another strong rate of 528,000 in the month of July. The unemployment rate dropped another notch to 3.5%.
In fact, before the slower-moving monthly numbers display signs of weakness, we normally observe a marked uptick in the weekly unemployment claims, which regular readers of my blog will remember is my preferred labor market business cycle indicator. Sure, there is a bit of an increase, but neither the level nor the slope of the unemployment claims is screaming “recession” right now.