Is America in a recession? GDP is not the only rule

According to early estimates, the US economy, measured by Gross Domestic Product, could have contracted in the three months between April and June. If added to the fall from January to March, they would add two consecutive quarters of decline.

By an oft-cited rule, that means the world’s largest economy is in recession.

But deciding when a recession has started or predicting its occurrence is not easy. The definition of “two quarters” is not the way economists think of business cycles, because GDP is a broad measure that can be influenced by factors such as government spending or international trade. Instead, they focus on factors such as employment, industrial production, and income.

What’s on the watch now is personal consumption data for May, released last week, which showed spending and disposable income falling on an inflation-adjusted basis. This has prompted a series of gloomy forecasts for June, and has increased speculation that a slowdown is coming soon, if it hasn’t already.

There is likely to be an intense debate over the coming weeks about the real health of the economy. Whether the United States is headed for or already in a recession is a growing concern for corporate bosses and their employees, the Federal Reserve and the administration of President Joe Biden.

IS NOT THE FALL IN GDP EQUIVALENT TO A RECESSION?

Not always. In 2001, the Gross Domestic Product, after revisions, fell in the first three months of the year, but then rebounded in the following three months to reach a level higher than that of the previous year. GDP fell again in the autumn.

Although there were not two consecutive quarters of GDP decline, the situation was then described as a recession, because employment and industrial production were falling.

The recession caused by the pandemic only lasted two months, from March to April 2020, although the sharp drop in economic activity during those weeks caused GDP to contract as a whole in both the first and second quarters of the year. In 2016 there was a notable drop in industrial activity that some called a “mini-recession”, but the GDP did not go down.

WHO AND HOW DECIDE IT?

In the United States, the official decision is made by a commission of economists convened by the National Bureau of Economic Research (NBER), and they sometimes make a decision a year or more after a recession has begun.

This private non-profit research group defines recession as a “significant decline in economic activity that spreads throughout the economy and lasts more than a few months”.

The group focuses on aspects such as employment and industrial production, which are measured monthly and not quarterly like GDP. Examine the depth of the changes, the duration of the declines, and the breadth of the problems.

However, concessions have to be made.

In the case of the pandemic, for example, the depth of the job loss, greater than 20 million jobs, offset the fact that growth resumed quickly, which led the group to officially describe the situation as a recession. in early June, before the end of the second quarter.

While each of the three criteria – depth, breadth, and even duration – “must be met individually to some extent, the extreme conditions revealed by one criterion may partially offset the weaker indications of another,” the group states.

IS THE USA IN A RECESSION?

Almost certainly not. Although the “two-quarter rule” has caveats and exceptions, no recession has ever been declared without job losses. Hundreds of thousands of jobs are being added in the United States each month.

The pace is likely to slow, but a sharp turnaround would have to take place for the current path of job growth to turn into one that resembles a recession.

Industrial production, another factor in the 2001 recession declaration, has also risen steadily, at least through May.

WHAT IS THE SAHM RULE?

One of the criticisms of the NBER’s role as arbiter of the recession is that its members take their time not reacting to changes in employment, production or other data that turn out to be temporary. An indicator closer to real-time recession, called the Sahm rule after the economist Claudia Sahm who worked at the Federal Reserve, is based on the unemployment rate.

It states that when the three-month moving average of the unemployment rate rises by half a percentage point from its lowest in the previous 12 months, the economy has entered a recession.

The Sahm rule shows no sign of a recession in the United States. By contrast, the unemployment rate has been below 4% and declining or stable since January.

The debate about a recession and predictions that the US economy is headed for one may influence what happens next. CEOs, investors and consumers make decisions about where and how to spend money based on how they think sales, profits and employment conditions will evolve.

Economist Robert Shiller predicted in June that there was a “good chance” the United States would experience a recession as the result of a “self-fulfilling prophecy” as consumers and businesses prepare for the worst. “Fear can breed reality,” he told Bloomberg.

WHAT IS A “SHOULDER RECESSION”?

Recessions take many forms. They can be deep but short-lived, like the pandemic recession that briefly pushed the unemployment rate to 14.7%. They can be dramatic and leave scars, like the Great Recession or the Depression of the 1930s, causing the labor market to take years to recover lost ground.

Economists and analysts have recently pointed to the possibility that the next recession in the United States will be mild. Even the shortest and weakest recessions have cut jobs by more than 1%, which would currently be more than 1.5 million people.

WHAT IS A GROWTH RECESSION?

Another idea discussed by some economists and analysts is a “growth recession”, in which the economic expansion slows below its long-term trend -in the United States between 1.5% and 2% per year-, while unemployment rises but not much.

It is the scenario outlined by some monetary authorities of the Fed as the best result of the recent rises in interest rates.

WHAT IS THE RELATIONSHIP WITH THE INVERSION OF THE YIELD CURVE?

When the rate of short-term loans in the market exceeds that of long-term loans, there is an inversion of the yield curve, which is considered a harbinger of a recession.

Historically, at least part of the yield curve has inverted before every recent recession, and the alarm bells started ringing when it hit on June 13.

The Fed’s research argues that the most widely followed yield curve measure, the difference between two-year and 10-year Treasury yields, doesn’t really predict anything; a better indicator is the difference between the three-month and 18-month rates, which has not been reversed.

WHAT IS THE RELATIONSHIP BETWEEN THE BEAR MARKET AND THE RECESSION?

The recent sharp drop in stocks has also set off alarm bells. Nine of the 12 bear markets, or declines of more than 20%, since 1948 have been accompanied by a recession, according to investment research firm CFRA.

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