It’s quite possible that, by the end of this week, we could be having yet another hugely important political debate over the definition of a word: “recession.”
How real and politically sensitive is that possibility? Real enough that the Biden administration is seeking to preempt it.
Late last week, the White House issued a document stating that two straight quarters of negative GDP “is neither the official definition nor the way economists evaluate the state of the business cycle.” Treasury Secretary Janet L. Yellen on Sunday went so far as to say she would be “amazed” if the National Bureau of Economic Research (NBER) — which determines whether we are officially in a recession — were to declare that. She also stated flatly that we’re not in a recession.
“Even if that [GDP] number is negative, we are not in a recession now,” Yellen said on NBC’s “Meet the Press.” “And I would, you know, warn that we should be not characterizing that as a recession.”
The reasons for this preemptive pushback are obvious: There’s a very real possibility we’ll see a second straight negative quarter, according to various forecasts. And that would not only color the Biden administration’s handling of the economy — something about two-thirds of Americans already disapprove of — but it would come with just more than three months to go in the 2022 midterm elections. Imagine the tail-end of that campaign taking place not just during a period of extremely high inflation, but during a recession, with Republicans having already been favored to retake both chambers of Congress.
The first thing to note is that two straight quarters of negative GDP growth isn’t determinative. The official determination is up to the NBER, a nonpartisan, private organization that utilizes other factors in making such calls.
The NBER’s definition of a recession (which, notably, predates the Biden administration) states:
While gross domestic product (GDP) is the broadest measure of economic activity, the often-cited identification of a recession with two consecutive quarters of negative GDP growth is not an official designation. … The NBER recession is a monthly concept that takes account of a number of monthly indicators — such as employment, personal income, and industrial production — as well as quarterly GDP growth. Therefore, while negative GDP growth and recessions closely track each other, the consideration by the NBER of the monthly indicators, especially employment, means that the identification of a recession with two consecutive quarters of negative GDP growth does not always hold.
But GDP is the big one, as the NBER has said, including in 2008 when we were entering what would later be declared a recession.
“We view real GDP as the single best measure of aggregate economic activity,” the NBER said at the time. “In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, we therefore place considerable weight on the estimates of real GDP issued by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce.”
And it’s rare for there to be two consecutive quarters of negative GDP without a recession. In fact, George Washington University professor Tara Sinclair said the only time on record appears to have been 1947.
“But to be clear I don’t think that just because it hasn’t happened in recent history means if we see two consecutive quarters of negative real GDP growth then we’re clearly in a recession,” Sinclair said. “A recession is defined as a broad-based decline in economic activity and that should show up in lots of different measures, not just one, even one as important as GDP.”
Indeed, the current setup features some extraordinary dynamics related to the coronavirus pandemic, with some of the other indicators the NBER’s definition isolates not in decline or at what are traditionally understood to be recession levels.
As The Washington Post’s Rachel Siegel wrote this weekend:
The GDP report will fuel a whole new set of questions over whether the economy is in a recession, or approaching one. By one definition, a recession is marked by two consecutive quarters of negative growth. The economy already shrank in the first three months of the year, driven mainly by a drop-off in inventory purchases and the United States not exporting as many goods.But a host of other signs suggest the United States isn’t in a recession. The job market is still churning. Crucially, consumers are still spending, especially on services. Businesses aren’t showing signs of widespread layoffs. Plus, the official recession call will be made by a panel of experts at the National Bureau of Economic Research (NBER), and it could be a ways away.
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.”
The NBER’s determination, based upon that definition, surely matters — particularly when it comes to how the potentially continued contraction is cast in the media (which is almost certainly the target of the White House’s missive).
At the same time, even without the determination having been made, a strong majority of Americans already believe we’re in a recession: 64 percent, in a CNN poll last week. That includes 56 percent of Democrats.
That’s not unusual. Polls will often show people think we’re in a recession even when we don’t have the GDP numbers to back that up, including as recently as 2014. People seem to, quite understandably, perceive “recession” as meaning the “economy is bad.” And with inflation sky-high now and the stock market struggling mightily, it’s perhaps not surprising that many people have reached that conclusion.
It’s also possible that, even if other indicators haven’t turned sufficiently negative for the NBER to declare a recession in the near future, these indicators could take a turn if we see a second consecutive negative quarter of GDP (perhaps combined with the Fed raising interest rates again, which could lead to higher unemployment) and the market adjusts accordingly. A recent CNBC survey found that 68 percent of chief financial officers expect a recession in the first half of 2023, so they might already be making decisions accordingly on things like hiring.
“The reality is the latest data tells us what we already knew: that inflation has persisted for way too long, and even when it cools, it may not cool enough,” Diane Swonk, chief economist at Grant Thornton, recently told The Post. “Words like ‘pain’ and ‘higher unemployment’ have seeped into the Fed’s messaging, which means they know they will likely have to raise the unemployment rate to a level that is consistent with a recession.”
But the timing of that determination would still be important; the first half of 2023 would put it after the midterm elections. Of course, in the interim we could see plenty on the right declare a recession themselves, with the Biden administration put in the position of arguing against it.
That debate has already begun, even as we await word Thursday about just how earnestly we must have it.