(The Hill) – The Commerce Department released data on Thursday showing that the US gross domestic product (GDP) shrunk for the second consecutive quarter.
The data prompted media headlines warning of a possible recession and protests from Republicans, quick to slam President Joe Biden for his economic policies.
For its part, the Biden administration played down recession fears that the decline in GDP for the first and second quarters of this year was only natural after a year of growth following the COVID-19 pandemic.
Still, amid the noise on the topic of economic decline, is the United States in recession? The answer: It depends on who you ask.
The White House: GDP shrinking is ‘not surprising’
Two-quarters of a contraction is an unofficial marker of recession, but one that may have little meaning in examining a post-pandemic US economy that has a sizzling labor market. More entrepreneurs are having trouble finding jobs than leaving them, and the second quarter reduced GDP minimally – 0.9 percent.
It’s also sure to be revised, meaning later this fall a better measure could show the economy actually grew in the second quarter, dismissing this first draft metric as null and void.
But the debate is more than just semantics.
GDP will weigh heavily in politics as Democrats try to hold a majority in the House and Senate this fall. The White House preemptively argued against the idea that two quarters of non-growth would equal a recession.
“Although some maintain that two consecutive quarters of real GDP decline is a recession, that is not the official definition or the way economists evaluate the state of the business cycle,” the White House said in a July 21 statement.
“It is unlikely that the decline in GDP in the first quarter of this year—even if followed by another decline in GDP in quarter II—indicates a recession,” the statement continued.
On Thursday, the White House continued to play defense on economic data, saying that “coming out of the historic economic growth last year – and regaining all the private sector jobs lost during the pandemic crisis – it is not surprising that the economy is slowing down as the Federal Reserve acts to lower inflation.”
Republicans drum recession
Meanwhile, Republicans pounced on the numbers, using the opportunity to criticize Democratic economic policies and make the case that the US is currently experiencing a recession ahead of the midterm elections this fall.
“America is in recession because of President Biden’s inflation crisis,” House Ways and Means Committee member Rep. Jason Smith (R-Mo.) said in a statement Thursday. “This news is not a surprise to the American people – they have spent the last 18 months in a dysfunctional economy marked by falling real wages, skyrocketing prices, empty shelves, and Help Wanted signs up and down Main Street.”
Other Republicans struck a more reserved tone in the recession designation, while also pointing to the pain Americans feel from everything being expensive.
“Splitting hairs over the technical definition of what is or isn’t a ‘recession’ is a distraction from the pain Americans continue to feel at the pump, in the grocery aisle and, now, from the threat of a declining economy,” Senate Finance Committee. ranking member Mike Crapo (R-Idaho) said in a statement on Thursday.
Experts say defining a recession is more complicated than a single metric
Both parties are right to point out the strange situation that persists in today’s economy, which is full of contradictions.
Despite a sharp economic recovery from the pandemic that set records for corporate profits, the threat of a recession has been looming ever since the Federal Reserve began raising interest rates in March to curb inflation, which is at its highest level in decades.
And despite rising interest rates, which are designed to cool an overheated economy and make it more expensive for companies to do business, the job market shows no signs of slowing down.
“The unemployment rate was lower in June in 10 states and the District of Columbia, higher in 2 states, and stable in 38 states,” the US Bureau of Labor Statistics reported last week. “All 50 states and the District had unemployment rates down from a year earlier. The national unemployment rate remained at 3.6 percent but that was 2.3 percentage points lower than in June 2021.
Adding to the current confusion is the fact that the unofficial designation of recession may be incorrect. The 0.9 percent decline reported by the BEA on Thursday is within the margin of error that normal revisions to quarterly GDP estimates can correct.
According to a 2021 BEA paper, “revisions between the prior and second estimates” in quarterly GDP “are in the interval (-0.94, 1.14).” This means that for the initial measurement of a 0.9 percent decrease in quarterly GDP, the second measurement could be below the 1.84-percent decrease or above the 0.24-percent increase.
Harvard University economist Mark Furman pointed on Twitter to a real-world example of this in June 2019 when the BEA reported that GDP growth had slowed to a disappointing 2.1 percent before being revised up to 3.1 percent. That’s a difference of one percentage point, much larger than the current quarterly decline measurement.
Applying historical trends to the first draft data from the BEA is “the wrong way to think about it,” Furman wrote in a Twitter thread on Thursday, responding to economists at the American Enterprise Institute, a DC conservative think tank. “You are looking at the most recent estimates that have been revised from the first ones published.”
There is “more than a 50 percent chance that Q1 and/or Q2 are revised to be positive. That’s part of the reason the NBER doesn’t rely on GDP ahead of time to call a recession,” he said, referring to the National Bureau of Economic Research, which is the official recession indicator.
Economists say that despite consecutive quarters of significant economic contraction, a more accurate classification of recession, informed by larger measurements, is still months away.
“There’s this perception, and people don’t get it wrong — probably in my economics textbooks from college — that it’s negative two quarters of GDP that the NBER uses to determine whether there’s a recession. That’s actually not entirely true. That’s true. looking at various economic indicators to make that designation,” Alex Durante, an economist with the Washington think tank The Tax Foundation, said in an interview.
“They’re going to look at employment, personal income, durable goods, housing permits, so GDP is definitely part of that, but they’re also looking at other indicators.”