What is a recession and why does the US say it is not yet close?

First modification: 07/28/2022 – 19:20

Recession seen as two consecutive quarters of economic contraction is a long-standing concept used by analysts around the world. But it is not written in stone.

In the United States, the Gross Domestic Product (GDP), which calculates the value of the national production of goods and services, contracted by 0.9% in the second quarter of this year compared to the same period in 2021.

This is the second fall in line after that of the first quarter of 1.6%, a scenario that, for those most attached to the traditional rule, would imply a recessionthat is to say, that the economy closed a cycle of growth to start one of decline.

However, the most widely accepted definition in that country is that of the National Bureau of Economic Research, a nonprofit group of economists that believes that a recession is caused by “a significant decline in economic activity that spreads a few months.”

Beyond two quarters of declines, this committee evaluates a wide range of factors before publicly declaring the death of a period of economic expansion and the birth of a recession. For the White House and the Federal Reserve, the United States is not the case.

Recession or not?

President Joe Biden and central bank officials agree that in those first six months of contraction, high inflation isn’t the only thing that matters. Businesses and other employers added a prodigious 2.7 million jobs, more than was gained in most years before the pandemic.

Wages are also rising at a healthy pace, and many employers are still struggling to attract and retain enough of their workforce. In addition, consumer spending maintains an upward trend.

That strength in the labor market is a key reason why the Federal Reserve has been raising its interest rate sharply, as it believes the economy should be able to withstand higher interest rates without entering a recession. Many economists, however, doubt that claim.

Inflation is out of control, with more than 9% per year putting it at its worst mark in almost 41 years. Rapid price increases, particularly for essential items like food, gasoline and rent, have eroded Americans’ incomes and led to a much more pessimistic view of the economy.

Recession or not, the US economy is not rolling as you would like. Many people now feel more financially burdened, with salary increases that do not grow at the same rate as the prices of the family basket.

With a Fed willing to do everything in its power to rein in prices, interest rates are its best weapon. However, higher rates alter companies’ willingness to invest, which could slow down hiring or eventually lead to layoffs.

With fewer jobs and a more fearful public, spending would shrink. And if that were to happen, it would pave the way to enter a true period of prolonged recession, the scenario that everyone fears but that many still do not dare to talk about.

With AP, Reuters, EFE