Economists Debate Recession Definition as Economy Contracts in 1st Half of 2022

Economists Debate Recession Definition as Economy Contracts in 1st Half of 2022
Woman shopping. (Viki Mohamad/Unsplash)
Andrew Moran
The U.S. economy contracted for the second straight quarter, falling at an annualized rate of 0.9 percent in the April-to-June period, new data from the Bureau of Economic Analysis (BEA) show.

Although the gross domestic product (GDP) performance meets the definition of a technical recession, many economists and Wall Street firms haven’t been quick to declare a recession based on the preliminary estimate.

According to Peter Schiff, president and CEO of Euro Pacific Capital, the way recession has always been defined is two or more quarters of negative GDP.

“This is the first time I’ve ever tried to see people put a spin on it,” Schiff told The Epoch Times.

However, Preston Caldwell, head of U.S. Economics for Morningstar, said the U.S. economy wasn’t in a recession in the first half of 2022, “despite the drop in second-quarter gross domestic product.”

The National Bureau of Economic Research has yet to formally declare a recession. But this doesn’t mean it can’t happen, according to Sean Snaith, an economist at the University of Central Florida.

“There has never been an occasion in which GDP contracted for two consecutive quarters and a recession was not eventually declared,” Snaith told Fox Business.

Moreover, the growing baseline scenario for many strategists and economists is that the U.S. economy will deteriorate in the coming quarters.

Economist Mohamed El-Erian said after the GDP data that the numbers point to “deepening stagflation and flashing red recession risk.”
El-Erian, when speaking in an interview with CNBC on July 28, noted that the economy is “weakening at a much faster rate than most people expected.”

“Inflation is not going to come down fast enough, given how fast the economy is weakening, and that’s going to put the Fed in the same dilemma it’s been in,” he said.

Traders work on the floor of the New York Stock Exchange (NYSE) on July 25, 2022. (Spencer Platt/Getty Images)
Traders work on the floor of the New York Stock Exchange (NYSE) on July 25, 2022. (Spencer Platt/Getty Images)
So if this isn’t a recession, what will economists and Wall Street experts measure to make an official determination that the United States is facing an economic downturn?

Inside the GDP Report

The first reason for the lack of recession calls may have to do with the contents of the report. BEA data highlight several details about the second-quarter GDP contraction.

Inventory investment fell, primarily because of a decrease in retail trade that was led by general merchandise stores and motor vehicle dealers. Housing investment also tumbled amid a decrease in brokers’ commissions.

Falling government spending also was reflected in the quarterly GDP numbers. Federal government spending eased amid a drop in nondefense spending, while the “decrease in state and local government spending was led by a decrease in investment in structures,” the BEA noted. Business capital expenditures also eased in the last quarter.

But these trends were offset by gains in exports and consumer spending.

As a percentage of GDP, private inventories clipped minus 2.01 percent. Residential and nonresidential fixed investment trimmed minus 0.72 percent and minus 0.1 percent, respectively. Government consumption cut minus 0.33 percent. However, net exports added 1.43 percent, while consumer spending injected 1 percent to the GDP print.

With two more estimates for the second quarter GDP coming out, these figures could be revised higher or lower.

“While this is a technical recession, the Fed is correct to say we aren’t in a ’real' recession yet since unemployment is still falling and consumers are still spending, but it appears to be only a matter of time,” James Knightley, chief economist at ING, wrote in a July 28 note.

“We are hopeful of a decent rebound in third-quarter GDP on the order of 2%, given ongoing improvements in the trade numbers and a rebound in the inventory contribution; but once again, this will mask what is happening in domestic demand.”

Public policymakers and analysts will also comb through other metrics, including industrial production, wholesale-retail sales, consumer demand, and real income.

But officials repeatedly emphasize strength in the labor market as the chief reason why the United States isn’t in a recession.

A man walks past a "now hiring" sign posted outside of a restaurant in Arlington, Va., on June 3, 2022. (Olivier Douliery/AFP via Getty Images)
A man walks past a "now hiring" sign posted outside of a restaurant in Arlington, Va., on June 3, 2022. (Olivier Douliery/AFP via Getty Images)

The Labor Market

The Federal Reserve, the White House, and many economists and market analysts say it’s challenging to declare a recession when job creation is robust.

In June, the U.S. economy added 372,000 jobs, and the unemployment rate sits at just 3.6 percent, according to the Bureau of Labor Statistics.

Economists who are looking ahead to the July jobs numbers are forecasting a gain of 255,000 new positions. If accurate, this would be the lowest gain of employment since April 2021.

“Improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution, as well as for African Americans and Hispanics,” Fed Chair Jerome Powell told reporters during the post-Federal Open Market Committee press conference on July 27. “Labor demand is very strong, while labor supply remains subdued, with the labor force participation rate little change since January.”

At the same time, experts have started discussing the plethora of developments pointing to a slowing labor market.

Schiff noted that real wage gains are “collapsing” and “falling probably at their fastest pace ever.”

“So to me, that’s a weak labor market,” he said. “It means that the labor market can’t deliver wage gains. Employees are forced to accept reductions, so how’s that a strong market?”

Initial jobless claims climbed by 256,000 in the week ended on July 23, higher than the market forecast of 253,000, the Department of Labor reported (pdf). The four-week average, which removes week-to-week volatility, surged to just below 250,000. This figure has risen every week since the middle of April.

Bryce Doty, senior portfolio manager at Sit Investment Associates, said economists possess “a delusional concept of ’recession.'”

“The population of a country knows it’s when their standard of living is declining,” Doty said in a note. “Since April of last year, real wages have turned negative. Workers are going backward, as higher costs outpace wage increases, resulting in a net reduction in what people are able to afford. The Fed claiming to be avoiding an arguably flawed definition of recession and marching on toward its goals of demand destruction and higher unemployment only worsens the plight of American workers.”