The U.S. economy barely grew at the start of the year, and it's barely growing any more than that now. It's bad enough that it's not completely crazy to wonder whether we've somehow slipped back into a mini-recession.
It's only mostly crazy. And even then, it depends on what you mean by "recession." If you're talking about the usual rule-of-thumb of two consecutive quarters of negative growth, then, yes, there's probably a 5 percent chance that we've fallen into one. But if you mean an economic decline that actually makes unemployment go up, then, no, we don't have to worry about the r-word. We just have to worry about a new normal of slow growth that might dip into negative territory every now and then even during the good times. In other words, about turning Japanese.
Now, once again, the economy has fallen into a funk that only evokes words like "stall speed" or "anemic" or "disappointing." The extreme winter weather helped pushed growth down to 0.2 percent in the first quarter, and the Atlanta Fed's GDPNow model only thinks it's up to 0.9 percent now. That's even worse than last year, when another polar vortex-induced slump at least gave way to a strong bounce back thereafter.
Why is this time different? After all, interest rates are still zero, austerity is still over, and unemployment is still falling. Well, the problem, as Greg Ip points out, is that just talking about tightening is tightening, because people will react as if you already did. So when the Federal Reserve said that it'd like to start raising rates in June, even if weak data is ultimately going to make it wait longer than that, the economy started slowing down. It didn't help that the rest of the world was cutting interest rates just as we were talking about raising them, which sent the dollar on a historic rally—making our goods less competitive both at home and abroad. Add in the fact that lower oil prices seem to be hurting business investment in new rigs more than it's helping consumer spending on, say, restaurants, and you've got everything you need for a slowdown.
More than that, actually. It's not inconceivable that the economy shrank to start the year. Now that we know how much bigger the trade deficit got in March, it will probably turn out that first quarter growth will get revised down into negative territory. And while it's far from likely, there's still a chance, as economist Scott Sumner points out, that second quarter growth won't be any better.
But if that happened, it'd be a funny kind of "recession." The economy has added 591,000 jobs so far this year—despite what was, in all likelihood, lower GDP—and even if that pace peters out, it's hard to imagine it would turn into job losses. Unemployment, in other words, probably wouldn't go up. That's the same thing, Sumner says, that happened to Japan last year. A big tax hike made its economy contract for two quarters in a row, but throughout this supposed recession, its unemployment rate actually fell from 3.6 to 3.5 percent. That's because, as Japan's workforce has shrunk, its economy has grow so little in the good times that it doesn't take much to make it look like a bad time. The U.S. doesn't face such a dramatic demographic decline, but productivity growth has been so feeble the past few years that, taken together with the Boomers hitting retirement age, our trend growth is probably a lot lower than it used to be, too.
Still, it's never good when you can't tell if your recovery is actually a recession.