Monday, July 25, 2022

Team Biden: You Know, Maybe We Should Reimagine the Definition of a Recession

 

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:


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: 


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:


But she went on to say this:


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:


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:


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:



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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