Last week I joked that we’re trying so hard to convince ourselves of a recession that we should just crater the economy now and be done with it.
Everyone listened to me!
Unexpected slowdowns in income, spending, private investment and manufacturing activity have raised the intriguing possibility that GDP growth for the second quarter will be negative instead of positive. In just days, the new data knocked the Atlanta Federal Reserve’s GDP forecast from 0.3% growth in the second quarter, which ended June 30, to a decline of 2.1% . GDP fell 1.6% in the first quarter, so if the Atlanta Fed forecast is correct, we would now have two straight quarters of GDP contraction. Official second-quarter GDP growth figures arrive July 28.
Consecutive quarters of GDP contraction used to be the popular definition of a recession. The group that formally determines the start and end dates of a recession, the National Bureau of Economic Research (NBER), now has a broader definition: “a significant decline in economic activity that extends across the entire economy and lasts more than a few months.” But if the economy has contracted for two consecutive quarters, that could meet the NBER’s definition and we could be in a recession right now. “It’s (unofficially) a recession!” said economist Ed Yardeni in a June 30 research note.
That would be great! Recessions often sneak up and the NBER, which favors accuracy over speed, usually doesn’t designate the start date of a recession until much later. The “Great Recession”, for example, began in November 2007, when the unemployment rate was 5%. Yet no one knew at the time. The NBER didn’t call this recession until a year later, after the financial crash of 2008 made it clear to everyone that epic annihilation was underway.
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There is a powerful reason to say that NO NO NO NO NO are we in a recession: the booming job market. The unemployment rate fell from 4% in January to 3.6% today, which is close to the 52-year low of 3.5%. There are still twice as many job vacancies as there are unemployed in the US economy. Since 1948, the unemployment rate has never fallen at the start of a recession. It normally increases as companies worry about a slowing economy and stop hiring.
Yet there is no obvious parallel between the post-war period and what is currently happening in the American economy. There was high inflation, as we have now, in the 1970s and early 1980s. But in modern history, there has never been an analog to the COVID pandemic and its dramatic distortions in supply and demand. Consumer demand for certain types of goods has increased during the pandemic, while supply chain disruptions have made those same goods more scarce. Result: inflation.
But it is now going the other way, as demand for goods declines and Americans now spend on services, such as air travel. Inflation is shifting from goods to services and there are now severe shortages in the service sector, which is why airlines that are short of workers are canceling flights and blocking passengers.
Energy prices are another wildcard causing economic models to short circuit. Gasoline and other energy prices are near record highs, largely due to Russian President Vladimir Putin’s invasion of Ukraine. This drives up the cost of food, manufactured goods and other products that require energy to produce and transport. But those same high prices cause “demand destruction,” where people reduce their purchases because the prices are too high. It’s… the recession.
The Federal Reserve, meanwhile, is aggressively trying to slow the economy, and even Fed Chairman Jay Powell has said the Fed could be wrong and go too far, causing a recession. Even if that’s the case, says Powell, it’s a fair price to pay to bring inflation down from the current level of 8.6%.
The best recession of all time?
But if we’re already in a recession, it could be the best recession ever, because we’ve managed to have a downturn without losing jobs. It would be unprecedented but, who knows, maybe just another head-spinning COVID distortion. Recessions are usually painful but virtuous, as they wring out excesses and unclog the economy, rebalancing destabilizing economic forces. The pain usually involves a lot of lost jobs. Maybe the pain this time around is $5 gas instead of high unemployment. People keep their jobs, their money runs out as price increases outpace wage gains.
There are still plenty of economists who recognize the slowdown but don’t think it’s a recession, at least not yet. But given how weird the whole economy has gotten, a recession this time around could be in the eye of the beholder. This is somewhat subjective at first, since the official designation is really just a consensus of informed experts.
Can a recession here and now help Biden? Absolutely. Biden struggles on the economy because he can do next to nothing on his own to get inflation under control, and for many Americans the economy looks like an amorphous blob of badness. If Biden could say to voters, “Yeah, we’re in a recession,” he could also say, “Maybe we’ll be out of it soon.”
Presidents need trigger points to build their narratives. Biden, of late, just had a confusing mass of data that doesn’t add up and consumer pain points that negate any statistical improvement in the economy. Talking about the imminent end of the recession would be better for Biden than his defensive insistence that a recession is not “inevitable.”
What voters need to see more than anything is hard proof that inflation is around. It won’t take a committee of economists to tell people that, since they know what a gallon of gas and a loaf of bread cost in real time. Recessions typically have this effect, as consumers and businesses are spooked and demand dries up, driving prices down. If this is where we are now, it could be the most welcome recession of all time.
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