September 9, 2022 | OPINION | By Andy Fresen | Illustration by Patil Khakhamian
When the Bureau of Economic Analysis releases the previous quarter’s Growth Domestic Product reports, it is often a mundane affair. GDP measures the size of the economy and is important in understanding national economic health. Stiff-collared economists engage in dull academic debate over quarterly GDP reports, and rarely, if the report is bad, it might show up in the local newspaper.
However, the 2022 Quarter Two BEA GDP report caused days of fierce national media attention, and even a presidential press conference. How could an estimate of one economic indicator become such a contentious event, and what does the data mean for folks around the country? The answer to both of those questions revolves around one word: recession.
On July 25, the BEA announced its initial estimate for Q2 of the 2022 GDP contracted at -0.9% annualized rate. This was the second quarter in a row of negative growth after the United States economy contracted by -1.9% in quarter one. The second consecutive negative quarter of GDP growth caused a fierce debate over declaring whether the economy was officially in a recession.
Economists often say that two quarters of negative GDP growth is a recession, but many economists were quick to point out that the two-quarter rule is only a guideline. For example, the 2020 pandemic recession only had two months of contraction. With about 15% unemployment and -30% annualized GDP contraction, accounting for duration wasn’t necessary. The two quarters rule almost always signals a recession –– the last time it happened without a recession was 1947. This time might be one of those exceptions.
The official definition of a recession is, “a significant decline in economic activity, spread across the economy for more than a few months.” The judgment of declaring recession is done by a committee of economists at the National Bureau of Economic Research. The committee was created to define periods of recession for the U.S. economy to be applied universally for research purposes, and was never intended to be a quick process for the news cycle. It usually takes between four and 21 months for an official designation.
The main reason why there is not a consensus for the U.S. economy being in a recession is not the delayed nature of NBER’S committee, but most other economic indicators don’t show a weak economy. The most important other sign is unemployment. Currently, unemployment is near an all-time low at 3.5% with little sign of collapse. Days after the BEA report, the July jobs report came in way above expectation with over 500,000 jobs added that month and strong wage growth.
2021 was also a year of abnormally high growth. Real GDP grew at 5.7% in the entire year, and at 6.9% annualized rate in Q4. Consumer spending, a key metric for the economy’s demand, has been stable. The main way recessions affect people is through unemployment, lower earnings, and less consumption. It is hard for many to see those effects in the first half of 2022.
The GDP number itself has been problematic. It is often revised and then significantly revised again. The Q2 number was already revised from -0.9% to -0.6%, and, given historical variation, there is a 34% change the final revision shows positive growth. Furthermore, GDP isn’t the only measure of the economy’s size. GDP measures production, but GDI, gross domestic income, measures earnings. Theoretically, and empirically, income and production should be equal. Currently, GDI showed the economy to be growing in both Q1 and Q2, not declining.
There are trouble signs on the horizon for the economy. The Federal Reserve announced more interest rates hikes, which slows the economy. Inflation, while not increasing in July, is still at an astronomical 8.5% over the entire year. But, the Q2 GDP numbers were dragged negative by mass sell-offs of inventory, which can indicate lower inflationary pressures.
The atmosphere of declaring a recession is tense due to the approaching US midterm election. Biden and his fellow Democrats are nursing a narrow majority in Congress. American voters usually hold the party in power responsible for the condition of the American economy. To add to Democrats’ woes, parties in power usually have trouble holding control of Congress in the midterms. An economy in recession could make Democrats’ holding Congress near impossible in November.
Republicans have a strategy to campaign on the economy for the midterms. The GOP official account tweeted out, “This is Joe Biden’s recession. The economy shrank for two consecutive quarters.” As the Clinton campaign adage goes, “It’s the economy, stupid!”
Conservatives are angry about the perceived inconsistency of economists and those associated with the administration. Donald Trump Jr tweeted out “Apparently The White House is changing the definition of recession this week so we can pretend that we’re not in one.” Conservative outrage of perceived left-wing politicization by technocrats and bureaucrats within institutions caused the BEA report to be an uncommonly vicious data drop.
As far as economics are concerned, a consensus has not yet formed. Goldman Sachs denies a first half of 2022 recession, and puts the odds of a 2023 recession at 33%. They proclaim any recession to be mild, according to their internal model. Paul Samilson once said, “The stock market had predicted nine out of the last five economic recessions.” Even markets and experts have their limits to predicting recessions, but, for the recent data that is available, most say it probably hasn’t happened… yet.