No, the economy is not in a recession (yet)

By Masao Suzuki |
August 1, 2022
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San José, CA - On July 29, the Bureau of Economic Analysis released their report on Gross Domestic Product for the second quarter of the year, April to June. GDP went down at a 0.9% annual rate. This followed a decline of 1.6% in GDP in the first three months of the year.

This led to an outcry among Republicans, reinforced by many articles in the corporate media, that a recession had begun. Republican leaders immediately showed their lack of basic economic sense, saying that the American people were already feeling the pain of recession. In fact, the pain that American workers and small businesspeople are feeling is inflation, which is not a sign of a recession. Just look at the last recessions in 2020 - who was complaining about inflation?

Unfortunately, the corporate media sowed confusion by spreading the common, but wrong definition that six straight months of declining GDP means that there is a recession. Among the worst was the Washington Post, which found an economist to quote (or misquote) saying that the last time that there was a recession without six months of declining GDP was in 1947. In fact the 2001 recession did not have six straight months of GDP falling. In addition the recessions in 1960 and 1970 did not have six straight months of declining GDP.

One reason that two quarters of falling GDP is not used by economists is that most recessions since World War II (when GDP figures were available), have a “double-dip” where there is a bounce in economic activity during a recession. Because of this economists also do not conclude that a recession is over as soon as the economy begins to grow again - the growth needs to be sustained.

The official definition of a recession is a lasting slowdown in the economy as shown by employment, sales, income and industrial production. The most important measure is employment, or the number of new jobs created, which showed an increase of 372,000 in June - not a sign of a recession!

The main reason for the decline in GDP was a decline in business inventories, or the unsold goods on store shelves and warehouses. The decline in inventories was 2% of GDP, more than twice the overall decline. Falling inventories were also a major cause of the decrease in GDP in the first quarter of 2022. Both were an unwinding of the huge build-up in inventories in the last three months of 2021. This build-up was so big that it drove GDP to the highest rate of growth (6.9%) since World War II, except for the post-pandemic bounce in 2020.

But even leaving aside the drop in business inventories, the GDP report showed many signs of present and future weaknesses. Housing construction fell by three-quarters of one percent, showing that the Federal Reserve’s campaign to raise interest rates is have an effect as mortgage interest rates surged and housing sales have fallen. Government spending on goods and services fell by one-third of one percent, showing the ending of the few remaining COVID-19 programs. Business investment fell by three-quarters of one percent. While all of these figures were small, they together outweighed the three-quarters of one-percent increase in household spending on goods and services.

In fact the only strong increase in the report was in U.S. exports. But this is unlikely to continue. Not only do exports go up and down a lot, but the rise in the U.S. dollar is making U.S. goods and services more expensive for other countries to buy. A number of other countries’ economies are struggling, in particular Germany.

The report on Personal Income and Outlays for June by the Bureau of Economic Analysis on July 29 showed that the Federal Reserve’s favored inflation measure, the Personal Consumption Expenditure Price Index hit a new 40-year high, rising 6.8% over the year earlier. This means that according to the Fed, there is no break in rising inflation. This means that the Fed will continue to increase interest rates in big steps. Many economists see another three-quarters of a percent increase likely in September at the next meeting of the Federal Open Market Committee, which sets short-term interest rates.

The business cycle, or the cycle of recession and economic expansion, date back to before the Civil War in the United States. Recessions began long before there even was a Federal Reserve, or a large and active federal governments. While the government and the Fed do not cause recessions, they can influence the timing and depth of a recession. The fall in government spending and continuing increase in interest rates will move up the onset of a recession. With the Fed focused on fighting inflation and the renewed effort to cut the budget deficit in Washington DC, the next recession could last longer and cause more pain to working Americans than economists expect.