The debate about whether we’re in a recession has officially begun.
The Commerce Department reported Thursday morning that gross domestic product, an economic measure of how much the U.S. economy is growing, has declined for two straight quarters. GDP fell 0.9 percent on an annualized basis in April, May and June, and 1.6 percent in the first three months of the year.
Consumer spending actually increased in the second quarter, according to the Commerce Department, while the decline in GDP came from lower government spending and decreased investment in both residential and nonresidential buildings, as well as less investment in inventories for businesses.
The reason this report — one of the most anticipated ones all year — is such a big deal is that two consecutive quarters of GDP shrinkage is typically a sign that we’re in a recession. But this report doesn’t mean we’re in one.
Right now, the Federal Reserve is actively trying to slow down the economy by steadily raising interest rates. It announced another 0.75 percent hike on Thursday, with Federal Reserve Chair Jerome Powell saying in his news conference, “I do not think the U.S. is currently in a recession,” while “the labor market is extremely tight, and inflation is much too high.”
Whether we’re in a recession isn’t necessarily an easy call. If we’re debating whether we’re in a recession, that’s a sign we’re not in one — at least not yet.
Looking under the hood: What does this GDP report say?
Particularly examined is the otherwise obscure “change in private inventories,” which measures how much businesses are adding to their stockpiles of stuff to either sell or manufacture products. This measure, which is famously volatile, has plummeted due to businesses getting caught up in the supply chain crisis, desperately trying to build up inventories to meet skyrocketing demand for goods and now being caught out on the other side with so much stuff that some retailers are telling customers to keep returned goods.
According to the Commerce Department, retailer and car dealer inventory additions were much smaller than the previous quarter. This change in private inventories took 2 percentage points alone off GDP growth in the second quarter.
There was also a meaningful slowdown in some of the otherwise positive components of GDP. Personal consumption growth, which is typically the powerhouse of the economy, shrunk from 1.8 percent in the first quarter to 1 percent in the second quarter. But even here, the aggregate number covers up a more complicated story. Goods consumption, after surging in the second half of 2020 and 2021, fell almost 5 percent while services consumption rose just over 4 percent.
Does this mean we’re in a recession? Not quite.
But is this a recession? While a common shorthand — and the official definition — in some countries is that a recession is whenever there are two consecutive quarters of declining GDP, that is not the case in the United States.
Instead, a committee of economists, convened by the nonprofit National Bureau of Economic Research (NBER), declares the month the economy has peaked (and a recession has begun) and when it has hit a trough (when the recession has ended) by looking at a range of economic data, of which GDP figures are only one component. These declarations typically occur several months after the respective turning points.
At the same time that the economy is contracting according to GDP, different metrics used by the NBER and other economists tell a more mixed story. Employment continues to rise, and industrial production is steady, while some measures of consumption and retail sales have been dinged by high inflation.
Whether we’re in a recession is becoming a political debate
In any case, the White House, which has been pointing to overall economic strength and job growth to contrast with high inflation, has staked out that the economy is not in a recession despite anticipating a second negative quarter of GDP. It’s not unusual for White Houses to fight off declarations they’re in a recession — as late as July 2008, George W. Bush was telling the media, “I’m not economist but believe we’re growing” (by December, the NBER would declare that the recession had in fact started a year earlier).
Over the weekend, Treasury Secretary Janet Yellen said, “This is not an economy that’s in recession,” but instead that “the economy is slowing down,” and “we’re in a period of transition in which growth is slowing. And that’s necessary and appropriate, and we need to be growing at a steady and sustainable pace.”
Brian Deese, the director of the National Economic Council, said Tuesday at a White House press briefing that “two negative quarters of GDP growth is not the technical definition of recession. It’s not the definition that economists have traditionally relied on.”
This recession definition question has predictably turned into a political headache for the White House, with one Fox News reporter tweeting that the White House is “redefining what a recession is” in response to a blog post by the Council of Economic Advisers walking through the recession dating and definition process.
While the question of whether we’re technically in a recession will be catnip for economists, journalists, and political consultants and admakers, how people and businesses feel about the economy — and how they make plans to save, spend and invest — is likely far more responsive to what they’re actually experiencing, or even just how they feel.
Thanks to Lillian Barkley for copy editing this article.