We are Officially in a Recession... Sort of

We are Officially in a Recession… Sort of

On July 28th at 8:30 am the Bureau of Economic Analysis (BEA) announced our official Q2 GDP Advanced Estimate at -0.9%. This is the second quarter in a row that we have a negative GDP (Q1 GDP was -1.6%). This means we are (or were) officially in a recession. Or does it?

The White House Press Release

On July 21st, 2022 the White House sent out a press release on their blog called “How Do Economists Determine Whether the Economy is in a Recession?”. Not so surprising, it is misleading right from the beginning. They answer the question What is a Recession? with:

“While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle.”
– White House

This is true but also false at the same time. Most economists and all new economists are taught that a recession is two consecutive negative GDP quarters. Granted they are correct that is not the official definition, but it is a good indication for one. They also claim that two consecutive quarters of falling real GDP is not how economists evaluate the state of the business cycle. But that is one way we follow the state of the business cycle.

Next, they go on to say that a recession is determined by a holistic look at the data including:

the labor market
consumer and business spending
industrial production
income

This is a fair statement, a better indication of the analysis of the economy is to look at more data about the economy. Not to just look at GDP. Next, they finish up their first paragraph with this implication:

“Based on these data, it is unlikely that the decline in GDP in the first quarter of this year—even if followed by another GDP decline in the second quarter—indicates a recession.”
– White House

The government knew the official Q2 announcement would be negative and they are trying to prepare their reasoning on why it is not a recession. They are attempting to lessen the damages of the impending doom of two negative GDP quarters.

National Bureau of Economic Research

According to both the White House press statement and the BEA, the official designation of a recession is determined by the non-profit organization the National Bureau of Economic Research (NBER). The White House says they define a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The NBER does say this on their website, but the White House conveniently neglects another statement they made about how they define a recession.

From the NBER themselves:

“A recession is the period between a peak of economic activity and its subsequent trough, or lowest point.”
– National Bureau of Economic Analysis

To my knowledge, two consecutive quarters of falling GDP is considered a drop from the peak of economic activity thus indicating a recession. But it is never a bad thing to consider other economic indicators to get a more accurate conclusion.

It is important to note that when the NBER does determine an official recession that doesn’t always mean we are currently in a recession but that we were previously in a recession. This is because the economic data lags. We determine GDP by quarter, so our data lags an entire quarter behind.

In July 2021 the NBER determined that between February and April of 2020 we were in a recession, 15 months later. This means the NBER can determine that we were in a recession in the first two quarters of 2022 but currently might not be. In fact, we most likely won’t hear from NBER on the official announcement of a recession in the first half of 2022 for many months.

Holistic View

Maybe GDP isn’t the best way to determine a recession. A holistic view of multiple economic factors seems like a good idea. Another sly trick, not only in the White House press statement but also by the NBER is that they do not directly consider inflation as one of their economic indicators in their holistic view. The claim is that it gets considered in their income and spending variables.

It is good practice to limit multicollinearity in their study, which is what they are doing by not considering inflation. But how convenient is it that one of the most popular economic indicators that determine economic activity is left out of their holistic view? Also quite conveniently employment is considered in their recession indicator variables. Unemployment is currently uniquely low for a recession. An increase in unemployment and you will start hearing a lot about stagflation.

The Pre-But

The White House is being very technical and nitpicky on what is and is not a recession. Some are even calling this press release the Pre-But. Yes, there are two consecutive negative quarters of GDP…. BUT…. here are x, y, and z on why it is not technically a recession.

They were preparing and protecting themselves for the impending negative Q2 result by misleading everyone about what a recession is. While technically right on their definition, they pick and choose their holistic view of data. This is textbook politics.

They know that when the announcement of an official recession comes out people and businesses will get scared. People will spend less money and companies will fire employees. This is cause more of a decline in economic activity confirming the official recession claim. It is a self-fulfilling prophecy. This is what the government is trying to prevent by claiming that we aren’t technically in a recession.

Now in my economics knowledge, two consecutive negative GDP quarters is considered an official recession. I think it is best to leave this definition to objective fact rather than a subjective bureaucratic decision.

Incumbent Pressure

I mean the pressure from the White House to have NBER not announce an official recession. Threats of budget cuts are plausible and scary to think about. Or even an increased budget if they don’t announce a recession. Although a heavy accusation, it is something to think about. One of the greatest indications of the incumbent politician being reelected is a good economy. Having the NBER announce it right before the midterm elections in November won’t be good for the current politicians who are up for reelection. The NBER claims to not be swayed by these politics, but even personal political beliefs can interfere with their decision. Hence the need for an objective definition.