Later this week, the Bureau of Economic Analysis will release its Gross Domestic Product estimate for the second quarter. If it comes in at worse than zero, which would constitute a second consecutive quarter of contraction, that would meet the traditional definition of a recession. How likely are we to see economic shrinkage in the forthcoming Q2 numbers? Many top experts -- including the former Obama Treasury Secretary who was conspicuously correct about inflation last year -- very much appear to believe it's coming:
Former Obama economic advisor Larry Summers says "there is a very high likelihood of recession" and it's "very unlikely" the U.S. will have a "soft-landing" pic.twitter.com/SkBNd2jUBx
— RNC Research (@RNCResearch) July 24, 2022
Remember, these were the updated figures from the first quarter, reported in late June:
The U.S. economy shrank at an annualized pace of 1.6% in the first quarter, reflecting a deeper contraction than previously reported. The Bureau of Economic Analysis's third and final estimate of first-quarter GDP released Wednesday morning showed a 1.6% annualized drop in economic growth to start 2022, more than the 1.5% previously reported and which was expected by economists...Last quarter marked the first drop in GDP since the second quarter of 2020, the COVID-19 pandemic upended the global economy. In the fourth quarter of 2021, real GDP increased 6.9%...The GDP report serves as a backwards-looking overview of economic activity, capturing the January-through-March period. Still, the metric is an important indicator of the state of the U.S. economy, especially as predictions of a recession mount...The BEA's advance estimate for second-quarter GDP due out July 28 may show a different picture as record-high prices begin to weigh on U.S. consumers.
A Bloomberg story out this week describes the US economy as "sickly" and in a "precarious" position, as a number of analyses are anticipating Thursday's announcement will reveal another quarter in the red. Fox Business described it this way just after the Fourth of July: "The Federal Reserve's key gauge for tracking U.S. economic activity currently estimates that gross domestic product shrank in the second quarter even more than in the first, increasing concerns that the country may already be in a recession. The latest reading from the Atlanta Federal Reserve Bank's GDPNow model, which is considered the central bank's primary tool for measuring growth in real-time, indicated July 1 that real gross domestic product shrank by 2.1% on a seasonally adjusted annual rate in Q2." This measure has since improved slightly, but the Atlanta Fed's quarterly GDP prediction remains in the negative:
On July 19, the #GDPNow model nowcast of real GDP growth in Q22022 is -1.6%. https://t.co/T7FoDdgYos #ATLFedResearch
— Atlanta Fed (@AtlantaFed) July 19, 2022
Download our EconomyNow app or go to our website for the latest GDPNow nowcast. https://t.co/NOSwMl7Jms pic.twitter.com/Fs2Qn8xT2J
It seems as though the Biden White House has resigned itself to another economic contraction, which would fit the longstanding 'rule of thumb' definition of a recession. We know this because rather than expressing confidence that the data will be better than some people are predicting (for what it's worth, I still think we could stave of that result with a very modest GDP increase in Q2, though I think that would merely delay what's nearly inevitable), they're out on television suggesting that we redefine the term 'recession.' Here's the current Treasury Secretary making a fairly straightforward point:
Treasury Secretary Janet Yellen: "A common definition of recession is two negative quarters of GDP growth”
— RNC Research (@RNCResearch) July 24, 2022
“Many economists expect second quarter GDP to be negative. First quarter GDP was negative.” pic.twitter.com/UsKdYCGdEj
But she went on to say this:
Yellen on Meet the Press says the US economy is not in a recession even if Q2 GDP growth is negative.
— Andy Duehren (@aduehren) July 24, 2022
"I would be amazed if the NBER would declare this period to be a recession even if it happens to have two quarters of negative growth," she said.
She's declaring herself preemptively "amazed" if the National Bureau of Economic Research calls two straight quarters of negative GDP growth a recession, even though that's been the general standard for many years. This wasn't a one-off musing, either. It's an official White House talking point:
Bracing for impact: Even if Thursday's GDP report shows a second consecutive quarter of negative growth, you won't hear the Biden admin using the R-word.
— Jacqui Heinrich (@JacquiHeinrich) July 24, 2022
The Council of Economic Advisers is redefining what a recession is...??https://t.co/HHBYJKqP5V pic.twitter.com/gecR93vPPj
Biden Chief Gaslighter @BrianDeeseNEC: "In terms of the technical definition, [two negative quarters of growth] is not a recession." pic.twitter.com/NpBNW5yvru
— Tom Elliott (@tomselliott) July 25, 2022
They're going to shift from trying to change the common definition of a recession to calling the recession 'transitory' at some point, aren't they? For less hackish takes, I offer these analyses:
Whether were in a technical recession is less interesting to me than the following 3 questions:
— Brian Riedl ?? ???? (@Brian_Riedl) July 25, 2022
1) Are jobs plentiful? (Yes - good)
2) Are real wages rising? (Falling fast - bad)
3) Is inflation hitting fixed income fams? (Yes - bad)
So, 2 of 3 are trending badly = worrisome.
Perspective on this. 2 negative quarters of GDP growth don't automatically force NBER to classify it a recession. However, there is a reason it's a rule of thumb. Since World War 2, we've had 11 instances of 2+ quarters of contraction. Every one was deemed a recession except 1947 https://t.co/HqHIALWF1p
— Scott Ruesterholz (@Read_N_Learn) July 24, 2022
Riedl is a reliable economic expert, so I'll defer to him, but I'd just say that GDP contraction is very much relevant to the broader picture of an economy's health. And as Summers says in the clip embedded above, low unemployment plus significant inflation is a turn-key recipe for recession -- so Rield's first point, while welcome, may not be as hopeful as it seems (though the robust job market at present is undoubtedly a meaningful and important bright spot that shouldn't be discounted). And while it's possible that an ingenious, Fed-engineered "soft landing" from inflation could help us avoid a painful recession, Summers obviously thinks such talk is nearly pure wish-casting. In other words, we might be in for even more rough sledding ahead, and it won't matter what words the Biden administration use to describe it. I'll leave you with this nugget about the current state of our economic disruption:
I can’t quite put my finger on what these places all have in common https://t.co/OswYDb6VrE pic.twitter.com/7nQ40JU1WX
— Guy Benson (@guypbenson) July 24, 2022
Some places are growing. Others are not. As I've said before, President Biden should be sending flowers and thank you notes to red state governors, rather than attacking them on a regular basis. Our concerning economic outlook would have been far worse, much longer without red state growth and flourishing.
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