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Just yesterday, Federal Reserve Chairman Jerome Powell said the U.S. economy is not in a recession, at least not right now. He acknowledged that preliminary gross domestic product numbers would be released this morning, and he said they’d be notable, but Powell added that the data should be taken “with a grain of salt.”
It was against this backdrop that CNBC reported on the numbers many have been waiting for.
The U.S. economy contracted for the second straight quarter from April to June, hitting a widely accepted rule of thumb for a recession, the Bureau of Economic Analysis reported Thursday. Gross domestic product fell 0.9% at an annualized pace for the period, according to the advance estimate.
Economic growth in President Joe Biden’s first year in office reached a 37-year high. The GDP data in his second year won’t be nearly as impressive.
That said, none of this was especially surprising. As the economic recovery intensified, and inflation grew, the Fed raised interest rates — and continues to raise interest rates — in order to cool things down. This morning’s Bureau of Economic Analysis report suggests the rate hikes are having the intended effects.
But as a rhetorical matter, a question hangs over head: Does negative growth in back-to-back quarters necessarily point to a recession?
That’s been a shorthand rule for quite a while, and when the White House started pushing back aggressively against this definition, Republicans accused Team Biden of playing word games and trying to redefine established words and phrases.
The truth is more nuanced. Sometimes, the National Bureau of Economic Research — the folks who are responsible for making recession designation — make the designation without back-to-back quarters of negative growth. It happened in 2020, for example, when Covid did dramatic economic harm.
Indeed, the National Bureau of Economic Research has been quite explicit in its rejection of the so-called “two-quarter definition.”
So why aren’t we in a recession? In large part because the economy is still creating jobs at an impressive pace. As the Washington Post summarized:
Roberto Perli, a former Federal Reserve economist and the head of global policy research at Piper Sandler, told The Washington Post: “Even the NBER wouldn’t define this as a recession. You need more than two quarters of negative GDP growth. You need the labor market and so on.” David Wessel, an economist at the Brookings Institution, cited the historically low unemployment rate as likely to give the NBER pause: “Right now the job market is the major factor stopping the NBER from declaring a recession even if we have two quarters of declining GDP.”
Lawrence Summers, a former Treasury secretary and a former director of the White House National Economic Council, added this week, “The claim that we are in a recession if GDP number is negative is made by people either ignorant of economics or looking to make political points.”