Most people think that back-to-back negative GDP quarters constitute a recession, but that’s not the case.
The National Bureau of Economic Research is the official arbiter of recessions, and uses multiple other factors in making its determination.
“The NBER would be laughingstocks if they said we had a recession when we were creating 400,000 jobs a month,” said Dean Baker, co-founder of the Center for Economic and Policy Research.
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Everyone who cares knows that recessions happen when there are two consecutive quarters of negative growth — everyone, that is, except for the people who actually decide when the economy is in recession.
For those folks, at the National Bureau of Economic Research, the definition of recession is much squishier.
Officially, the NBER defines recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
The bureau’s economists, in fact, profess not even to use gross domestic product, the broadest measure of activity, as a primary barometer.
That’s important, because data coming Thursday could indicate the U.S. saw its second straight negative-growth period in the second quarter. Even though every period since 1948 of two consecutive negative quarters has coincided with a recession, that may not happen this time.
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Why? It’s complicated.
“The NBER would be laughingstocks if they said we had a recession when we were creating 400,000 jobs a month,” said Dean Baker, co-founder of the Center for Economic and Policy Research. “I can’t even imagine they would think for a second that we’re in a recession.”
Indeed, nonfarm payrolls grew an average 457,000 a month during the first six months of the year, hardly conditions associated with an economic downturn.
Moreover, there are 11.3 million job openings and just 5.9 million available workers to fill them, indicating hiring should continue to be strong.
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The case for recession
But there have been downsides as well.
Consumer spending on a dollar level has been solid, but when adjusted for a 40-year high for inflation it has been much less so. The U.S. trade deficit hit a record high in March, another negative for GDP. Inventories have lagged, which also hurts growth as it is measured by the Bureau of Economic Analysis.
World Bank chief says inflation might last for two years, and some countries will find it ‘very hard’ to avoid recession
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The head of the World Bank thinks it might take years to get prices back under control as the U.S. and other economies face inflation rates not seen in decades.
“It’s going to take months and months, and maybe two years to bring inflation back down,” said David Malpass on CBS’s Face the Nation Sunday.
Record inflation and shortages of key commodities like oil, fertilizer, and wheat, mean “it’s going to be very hard” for some countries to avoid recession, Malpass said.
“A lot of the world is shutting down for lack of fertilizer. And then those shortages of crops will last for multiple years,” said Malpass, warning that food shortages might lead to “instability” in poorer countries.
The U.S. recorded 8.6% inflation in May, a 40-year high, spurring the Federal Reserve to plan a series of aggressive interest rate hikes to bring prices back to a reasonable level. The Federal Reserve increased interest rates by 0.75 percentage points on June 15, its most aggressive hike in almost 30 years. The World Bank is concerned that interest rate hikes in advanced economies could drag down the world economy.
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“The recovery from the stagflation of the 1970s required steep increases in interest rates by major advanced-economy central banks to quell inflation, which triggered a global recession,” wrote the World Bank in its June report on global economic prospects.
Malpass suggested that U.S. Federal Reserve Chair Jerome Powell focus less on interest rate hikes and start using the central bank’s regulatory tools to tame inflation.
“Let the banks lend more,” said Malpass. “It could put more money into the supply chain,” alleviating the supply constraints that are driving current inflation.
For now, the World Bank isn’t projecting a recession in the U.S. Earlier this month, the World Bank estimated that the U.S. wasn’t likely to head into a recession, forecasting 2.5% GDP growth for 2022. That’s still a 1.2 percentage point drop from the forecast the bank made in January, and a 3.2 percentage point drop from the bank’s estimate of 5.7% growth in 2021.
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The World Bank also predicted that global growth would slow to 2.9%, a drop of 1.2 percentage points from their January forecast, and a 2.8 percentage point drop from their 2021 estimate of 5.7% global GDP growth.
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But Malpass admits that a recession in the U.S. isn’t out of the question, saying he doesn’t disagree with estimates that put the risk of a recession in the U.S. as high as 50%.
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In a Wednesday Senate hearing, Powell noted that a recession was “certainly a possibility,” saying that bringing down inflation while preserving growth “is going to be very challenging.” A survey of economists earlier this month gave a 66% chance that the U.S. would fall into recession in 2023.
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