The latest GDP figures – suggesting the economy has contracted in each of the past two quarters – have intensified the debate over whether the US economy has fallen into recession.
Today’s bulletin will briefly explain this debate. But I also want to explain why some of this discussion is semantic and irrelevant to most Americans. The more important question is simpler: are the problems in the economy likely to worsen in the coming months or will the situation stabilize and perhaps even improve?
This issue has tangible effects on people’s lives. It can influence your decisions about buying a house or car, finding a new job, and being careful about your spending. There is no clear answer, but there is some useful information.
It is useful to start with a basic framework: the economic decision-makers of the country want to the economy to weaken, but not too much.
The main economic problem in recent months has been an overheated economy, with more demand for goods than supply, leading to the highest levels of inflation since the early 1980s. To bring inflation down, the The Federal Reserve has raised interest rates, which encourages families to spend less money and, in turn, stops prices rising so rapidly.
“We have high inflation and historically high inflation,” Cecilia Rouse, chair of the White House Council of Economic Advisers, told me and other reporters yesterday. “In order to bring inflation down, we understand that the economy needs to cool down.”
But it is very difficult for Fed officials to find the right balance. They are trying to bring about a big enough drop in spending to reduce inflation, but not a big enough drop for businesses to cut jobs, unemployment to rise and the economy to fall into a vicious cycle.
When people wonder if the economy is entering a recession, the underlying tangible question is whether this kind of vicious cycle is beginning. So far, he doesn’t seem to have. Still, the risks over the rest of 2022 are substantial.
Deep, wide, sustained
There is no single definition of a recession. An informal definition is two consecutive quarters of contraction in gross domestic product (a measure of the output of the economy). With yesterday’s GDP report, the economy has reached that standard.
Most economists, however, do not like the definition of two-quarters. They consider it too narrow because it is based on a single economic indicator. Any indicator, even GDP, can sometimes be misleading.
Right now, GDP may be exaggerating the economy’s troubles for a few temporary technical reasons involving global trade and business inventories, said Mark Zandi, chief economist at Moody’s Analytics. Another broad measure of the economy, known as gross domestic income, hasn’t fallen in recent months, and it tends to be less volatile than initial GDP estimates (yesterday’s figure was a first). estimate, and the government will revise it – perhaps even to a positive number – as new information comes in.)
The volatility of the initial GDP figures is why economists generally prefer a different definition of recession. The National Bureau of Economic Research, a private, nonprofit organization, appoints a small standing committee of academic economists who make statements that many other experts consider official. The NBER defines a recession as a significant, persistent, and widespread decline in economic activity, and committee members tend to wait months, until enough data becomes available, to declare that a recession has begun. .
(My colleague Ben Casselman wrote a good explanation of recession definitions this week.)
One of the main reasons to doubt that the economy has already entered a recession is the strength of almost all indicators other than GDP Consumer and business spending, for example, continues to increase, as does employment . “It’s hard to see how we suffered from a recession in the first half of this year when the economy created so many jobs, vacancies hit an all-time high and layoffs hit record highs. “, said Zandi.
As you can see in this chart from my colleague Ashley Wu, the labor market’s final months bear little resemblance to the rise of other recent recessions:
The anxiety index
There is a caveat: professional economists are almost always late in recognizing the onset of a recession. Why? They make judgments based on delayed data and, like other human beings, they are susceptible to irrational optimism.
Historically, when economic forecasters have said the odds of a near-term recession are at least 30%, that means a recession is actually more likely than not. I have referred to this number in the past as the anxiety index. What is it now? About 44%, according to the latest Wall Street Journal survey of forecasters. The anxiety index flashes red.
“Are we in a recession? We don’t think so yet. Are we going to be in one? It’s high risk,” Joel Prakken, the US chief economist at S&P Global Market Intelligence, told Ben Casselman.
The Fed’s interest rate hikes – combined with high energy prices caused by the Russian invasion of Ukraine and the continued Covid disruptions around the world – have created a significant possibility of a vicious cycle of spending cuts and job cuts. The Fed, of course, still hopes to avoid this outcome and achieve a so-called soft landing of lower inflation and continued economic growth. But, as Michael Feroli, an economist at JP Morgan, told my colleague Jeanna Smialek, “The degree of difficulty has probably increased.”
It’s a strange time for the economy. On the one hand, the GDP figures appear to have exaggerated the weaknesses in the economy over the past six months. On the other hand, there are legitimate reasons to worry about the economy over the next six months.
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Beyoncé’s previous unorthodox ways, including surprise visual albums and exclusivity deals with streaming services, have steered her somewhat away from the mainstream commercial market. Her last No. 1 single was “Single Ladies” in 2008, despite her continued prestige.
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PS Gilbert Cruzwhose cultural endorsements appear in The Morning on Saturdays, will be the Times’ next book editor.