No, We’re Not in a Recession yet

The headlines this morning told us that GDP shrunk and we must be in a recession. But some disagree. I think perhaps it can’t be a very bad recession if the experts can’t agree we’re in one.

On the “we’re in a recession” side: Everybody on Fox News, I’m sure.

On the other side: Paul Krugman

There’s a pretty good chance the Bureau of Economic Analysis, which produces the numbers on gross domestic product and other macroeconomic data, will declare on Thursday, preliminarily, that real G.D.P. shrank in the second quarter of 2022. Since it has already announced that real G.D.P. shrank in the first quarter, there will be a lot of breathless commentary to the effect that we’re officially in a recession.

But we won’t be. That’s not how recessions are defined; more important, it’s not how they should be defined. It’s possible that the people who actually decide whether we’re in a recession — more about them in a minute — will eventually declare that a recession began in the United States in the first half of this year, although that’s unlikely given other economic data. But they won’t base their decision solely on whether we’ve had two successive quarters of falling real G.D.P.

Then there’s a bunch of nerdy economic stuff, and then he says the more accurate measure of the beginning of a recession is a rising unemployment rate.

The Sahm Rule, developed by Claudia Sahm, a former Fed economist currently at the Jain Family Institute, tries to identify the start of recessions by looking for significant increases in the unemployment rate.

According to the Sahm Rule, we are not in a recession. A guy named Kevin Dugan at New York Magazine says something similar

The question of whether the U.S. is currently in a recession has taken on greater urgency since the first quarter saw a decline in gross domestic product and the following three months were a period of rising inflation. Powell seemed to not take that much stock in the negative GDP print and noted that those numbers change all the time. And Claudia Sahm — who, as an economist at the Fed, came up with a widely followed recession indicator that looks at rising unemployment — wrote that the negative growth has a lot to do with retailers’ imports and the weird effects on the supply chain from the pandemic rather than anything to do with the health of the economy.

Here’s Claudia Sahm herself.

Unemployment rates are going down, not up. Therefore, there is no recession. Whether it’s a good idea for the Fed to continue to crank up interest rates to slow inflation is another question. Back to Krugman:

The U.S. economy is not currently in a recession. No, two quarters of negative growth aren’t, whatever you may have heard, the “official” or “technical” definition of a recession; that determination is made by a committee that has always relied on several indicators, especially job growth. And as Jerome Powell, the chair of the Federal Reserve, noted yesterday, the labor market still looks strong.

That said, the U.S. economy is definitely slowing, basically because the Fed is deliberately engineering a slowdown to bring inflation down. And it’s possible that this slowdown will eventually be severe and broad-based enough to get the R-label. In fact, on this question I think I’m a bit more pessimistic than the consensus; I think the odds are at least 50-50 that history will say that we experienced a mild recession in late 2022 or early 2023, one that caused a modest rise in the unemployment rate. But what’s in a name?

The real question is whether a moderate slowdown, whether or not it gets called a recession, will be sufficient to control inflation. And the news on that front has been fairly encouraging lately.

Overall inflation is at a 16-month low, he says, although it is too soon to declare victory. I suspect food prices are going to remain high because of the hot, dry summer here in farm country. Crops are burning up in some places, and with the war in Ukraine wheat is going to be way scarce globally. There’s nothing the Federal Reserve can do about that.

One thought on “No, We’re Not in a Recession yet

  1. If the unemployment rate doesn't fit recession must get acquitted.  It is more than that, but economics is a dismal science at best and terms are not defined nearly as well as in the hard sciences.  We also had Trump running the economy hot with excessive borrowing and very loose interest rates.  Then we had pandemics and shutdowns with supply chain issues.  More importantly, we had political distortion of data and indicators.  The politics of the day was a standing order to "shoot the messenger" who brought bad news.  Yes. we ran up the country credit card, and we need some fiscal sanity and a reality smack down.  So far this is happening.  

    Yes, farm crops have generally suffered this year in many areas.  I guess the St. Louis area got all our rain all at once.  Such is climate change.  Low supply means price increases, the backbone of the dismal science.  Still wheat is fifteen cents a pound for the farmer.  The price of bread is another story.  It is a shame we eat poor bread at high prices.  So too a shame we get poor medical care at high prices.  Let us see if we can get drug prices at non extortion level prices for seniors, diabetics, and other at need.  For once there appears to be a light at the end of the tunnel.  Let us hope it is not another illusion.  


Comments are closed.