Are we in a recession or aren't we?
The Bureau of Economic Analysis, or BEA, reported a month ago that the U.S. economy contracted for the second straight quarter that ended June 30 – a widely accepted rule of thumb for what typically constitutes a recession. According to the BEA's advance estimate, Gross Domestic Product fell at an annualized rate of 0.9% for the second quarter—which has since been revised downward to a decline of only 0.6% following a 1.6% decline in GDP reported for the first quarter of 2022.
A debate rages on among economic experts as to whether these particular two consecutive quarters of declining GDP indeed signal a recession or if contrary economic data—such as record low unemployment and high inflation, among other factors—make this decades-long indicator less valid than it has been in the past.
So, are we in a recession or not?
James R. Barth, Lowder Eminent Scholar in Finance at Auburn University's Harbert College of Business, has examined the relationship between initial estimates of quarterly GDP and their value as a predictor of whether the U.S has entered a period of economic recession. He shares his thoughts about the conflicting economic data and what it might mean for the U.S. economy going forward.
I cover business cycles using data from 1857 to the present in my undergraduate course every spring. This includes the topic - "How do we know when we're in a recession?" I show them the dates of all the recessions over the period, and the data typically shows that whenever real GDP has declined for two consecutive quarters, it turns out that we'd entered a recession.
But it isn't that simple, is it? The formal determination of whether we've entered a recession isn't made until well after two straight quarters of negative GDP have been recorded, right?
That's true. Right now, it's too soon to know. The reason is that the eight economists associated with the National Bureau of Economic Research, or NBER, who date business cycles are still examining the data. The practice has been to rely on their definition of a recession, which is a significant decline in economic activity spread across the economy and lasting more than a few months. Unfortunately, their determination of recessions typically takes between four and 21 months.
One might compare their procedure to that of a doctor. When you go to your doctor, he or she might say: "There are a few possible reasons for your symptoms, and I think I know what's wrong with you, but I need to conduct a few more tests to be sure." Would you say: "No thanks, doc, I'll go with your initial thoughts" rather than wait for the results of the tests your doctor needs to be sure of their diagnosis?
- The first factor to consider is that these formal assessments are always made after two consecutive quarters of negative real GDP growth have been reported. During the four months or so after that, the eight economists at NBER conduct a detailed analysis and deep-dive assessment of the country's economic health, pulling in a much broader range of data than "mere" real GDP growth decline. These data points include unemployment claims, job growth, consumer confidence, etc.
- The second factor pertains to the relative impact of other conditions that may skew the viability of real GDP decline alone as a clear indicator. This time around, these include the impact of the COVID-19 pandemic, the war in Ukraine, persistent supply chain disruptions and emerging political and trade issues with China, to name just a few.
Let's take the first factor you identify—can you walk us through what goes into the more detailed assessment you describe? What other economic data beyond GDP are you referencing?
The comprehensive, research-based analysis of the economy the NBER relies on a host of economic statistics beyond real GDP growth. These experts take into account data from the Bureau of Labor Statistics, the Conference Board and other respected sources to paint what they consider to be a clearer, more vivid picture of the U.S economy at any given point.
Let's look at what some of these indicators tell us today:
- Unemployment claims continue to log record lows for the first half of 2022 and have declined every week since August. We typically don't see unemployment at these historically low levels—a little over 200,000 claims per week—during a recession.
- Job openings are also at extraordinarily high levels, rising from 10.7 million job openings in June to 11.2 million in July. Recessions typically come with a reduction in available jobs, not an increase.
- Consumer confidence is another measure economists use when determining whether we've entered a recession, and again, this metric today appears to contradict what normally occurs during a recession. The Conference Board reported that consumer confidence rose from 95.3 in June to 103.2 in July, which is not what one might expect during a recession.
As you mention, these seemingly contradictory economic metrics are not the only factors these experts have to contend with as they consider whether or not we've entered a recessionary period. A wide range of global issues impacting the U.S. economy today are presenting unique challenges, aren't they?
Yes, they are, and here's where everything happening today needs to be considered according to the impact these economic factors have on people living at various income levels, socio-economic status, financial security, etc. On the one hand, high employment, robust job growth and the corresponding wage rise might benefit everybody in the U.S.—but a closer look says otherwise. If wages rise by 4% while the cost of goods and services go up by 8%, real wages go down, as does purchasing power.
Inflation, in particular, affects people in lower income brackets much more than those with higher earnings, a more stable financial footing and the ability to tap into savings or cut discretionary spending. People in lower economic brackets don't have that flexibility. Gas prices have come down over the past few months but remain high. The cost of food and other essential goods rose, and it isn't clear how quickly they might come down or how much.
Everything you're saying here points to uncertainty. There doesn't appear to be precedent to look to for guidance regarding this historically divergent set of economic indicators. What can the federal government, including the Federal Reserve, do to help rectify today's challenging economic circumstances, especially inflation?
I'm glad you included the federal government vs. the Fed alone, which is the agency most people look to for relief. The Fed can raise interest rates to help cool down economic growth and drive down inflation. The Fed is acting, and it is having some effect. But we need to look beyond the Fed and interest rates for answers. The federal government's recent spending surge certainly contributes to inflation despite claims to the contrary. In these difficult times, we need to think bigger.
Sure. Consider this: We can't have a healthy economy without healthy people. And yet, we devoted so little of our resources to preventing something as straightforward as the COVID-19 pandemic. The government's biggest failure—which the director of the CDC recently admitted—was the mixed messages regarding testing, masks, vaccines, etc. Get tested, don't get tested. Wear a mask, don't wear a mask. Get vaccinated, don't get vaccinated. Even after all we've been through, we haven't made much of a dent in resolving that uncertainty. Furthermore, we should never forget that the critical resource in our country is human capital, and much more should be done to improve the health and education of our people.
One thing we might do—which would take a separate interview to flesh out fully—would be to allocate $50 billion or so to scientific research about how to best combat the next pandemic and deliver that science-based information to the public. At the same time, we need to build the health care sector to be ready should the event occur. When you reduce uncertainty, you free up people to act in ways that more closely approach "normal times," whatever that might be.
What else should we know about the current condition of the U.S. economy?
We need to remember that recessions, inflation, interest rate fluctuations, etc. are all global issues—virtually every economy in the world faces them. We are not alone.
That reminds me of an opportunity I had a few years ago to travel to Moscow to speak at The International Foundation for Socio-Economic and Political Studies. Sitting next to me on my panel was Mikhail Gorbachev, the former president of the Soviet Union, who passed away just a few days ago. We had a chance to chat one-on-one, and it was interesting to hear the views of the former leader of a country with economic drivers that are often markedly different than those in our own country—and quite a different perspective on human capital as well.
I was honored to represent Auburn and participate in substantive economic discussions on the international stage and bring that experience and those wide-ranging views back to my students here on the Plains.
About Dr. James R. Barth:
James R. Barth is the Lowder Eminent Scholar in Finance at Auburn University's Harbert College of Business, a Senior Fellow at the Milken Institute and a Fellow at the Wharton Financial Institution Center. He was consistently recognized by SSRN as among the top 10% of authors as measured by all-time downloads. SSRN is devoted to the rapid worldwide dissemination of research and is composed of many specialized research networks. Barth has also been a visiting scholar at the U.S. Congressional Budget Office, Federal Reserve Bank of Atlanta, Office of the Comptroller of the Currency and the World Bank.
James R. Barth is the Lowder Eminent Scholar in Finance at Auburn University’s Harbert College of Business, a Senior Fellow at the Milken Institute and a Fellow at the Wharton Financial Institutions Center. He has been a visiting scholar at the U.S. Congressional Budget Office, Federal Reserve Bank of Atlanta, Office of the Comptroller of the Currency and the World Bank.
Auburn University is a nationally ranked land grant institution recognized for its commitment to world-class scholarship, interdisciplinary research with an elite, top-tier Carnegie R1 classification, life-changing outreach with Carnegie’s Community Engagement designation and an undergraduate education experience second to none. Auburn is home to more than 30,000 students, and its faculty and research partners collaborate to develop and deliver meaningful scholarship, science and technology-based advancements that meet pressing regional, national and global needs. Auburn’s commitment to active student engagement, professional success and public/private partnership drives a growing reputation for outreach and extension that delivers broad economic, health and societal impact.