US Economy is in a Recession But What is a recession?

Workers at the construction site

US Economy is in a Recession

U.S. economy just had the 2nd quarter of negative growth. Is it in a recession?

The U.S. economy shrank in the last three months by 0.9%, according to the Bureau of Economic Analysis, a decrease of 2.1% from the previous quarter. This is the second consecutive quarter where the economy has contracted, and it follows a first-quarter contraction of 1.6%.

US Economy

A two-quarter period of negative growth is not an official definition of a recession, but it's often considered one. The National Bureau of Economic Research determines when the U.S. economy is in a recession. An NBER committee made up of eight economists makes that determination and many factors go into that calculation.

The White House has refuted the idea that the economy is in recession. It must be aware of how much the economy will affect voters' decisions during the midterm elections. President Biden cited record job growth and foreign business investment as signs of strength in the economy. "That doesn't sound like a recession to me," Biden concluded.

Is a recession really defined as a decline in jobs?

In her appearance on NBC's Meet the Press, Treasury Secretary Janet Yellen noted that while two consecutive quarters of negative growth is generally considered a recession, conditions in the economy are unique.

"When you're creating almost 400,000 jobs a month, that is not a recession," she said.

Regardless of which way you cut it, the economy has weakened. The GDP report showed that businesses had retrenched. Undoubtedly, borrowing costs have risen with the Federal Reserve increasing interest rates. So there's less money available for investing in new businesses and start-ups. This could lead to job losses if firms decide that hiring more workers will cost more than their business generates in revenue.

During the pandemic, retailers had to work through a glut of inventories. That led them to spend less, and housing (which has been running hot) is starting to cool with mortgage rates rising.

In spite of all the bad news, there was some good. Wages continued to rise and people were treating themselves by going out to eat at restaurants and also traveling. Income overall rose.

The U.S. economy is adding jobs month after month, as Yellen noted. "This is not an economy that's in a recession," she said. "A recession is a broad-based weakness in the economy; we're not seeing that now."

The White House doesn't like the word recession

As the midterm elections approach, the White House is acutely aware of the optics of a country in recession, where Americans are struggling financially. But with inflation running at a multi-decade high and so many things skyrocketing in cost, many Americans are already taking it on the chin.   According to a recent Morning Consult/Politico poll, 65% of registered voters who responded said that they believe that we are already in one.

What are the telltale signs that a recession is on its way?

The National Bureau of Economic Research, a nonprofit organization affiliated with Columbia University, says that the definition of a recession is "a significant decline in economic activity that is spread across the economy and that lasts more than a few months."   Employment is a part of the group's calculus, and the labor market has continued to show signs of strength. In June, the unemployment rate reached its lowest point in nearly seven years at 3.6%, and the economy added 372,000 jobs.

Michael Gapen, the chief U.S. economist at Bank of America Securities, says that he doesn't think the NBER would look at the data right now and say that the economy is in a recession. But it's unclear how much Americans will care about whether their current economy satisfies a specific, highly-technical definition or not.

Slowing parts of the economy 

What is clear to everyone is that the economy is slowing, prices are rising at their fastest pace in decades, and the housing market has started cooling. The Federal Reserve raised interest rates by additional three-quarters of a percentage point on Thursday.

Economists agree that the headline number on Thursday — how much the economy grew or shrunk on a percentage basis — will generate the most interest, but they say it's important to dig into the underlying data.

According to Michelle Meyer, chief economist at the Mastercard Economics Institute, it's the pieces of the puzzle that matter when it comes to gauging economic growth. Among other things, we'll need to see if household spending kept pace with inflation.

However, as Fed Chair Jerome Powell and other policymakers have acknowledged, at a moment like this, when there is so much uncertainty and economic pain for many Americans, sentiment, and expectations matter the most. The key for the economy is not to lose too many jobs.

Meyer says that it all comes down to jobs. "Whether you have one or not," he says, "and what that means for your future path of income."