President Joe Biden’s White House desperately does not want Americans to think we are in a recession even if the U.S. economy contracted for two straight quarters this year.
The administration argued over the weekend that a “technical recession” does not count as a real, honest-to-goodness economic recession.
“You don’t see any of the signs now. A recession is a broad-based contraction that affects many sectors of the economy. We just don’t have that,” Treasury Secretary Janet Yellen said on Sunday. “But inflation is way too high. And, you know, the Fed is charged with putting in place policies that will bring inflation down. And I expect them to be successful.”
The U.S. economy shrank at an annual rate of 1.6 percent in the first quarter of this year. On Thursday, the government will release its preliminary estimate for second-quarter growth. Many analysts expect the economy contracted again in the second quarter.
The Atlanta Fed’s real-time GDP tracker, GDPNOW, indicates that data released so far show the economy shrinking 1.6 percent again. The median forecast among economists has the economy growing at a 0.5 percent growth rate, but that may be an out-of-date forecast given the recent flow of worse-than-expected data. Bank of America projects the economy shrank at a 1.5 percent rate.
The belief that two straight quarters of economic contraction means that we are in a recession has a long pedigree, although it is more of a rule-of-thumb guideline than an unwavering threshold. The semi-official arbiter of when a recession begins is a private organization called the National Bureau of Economic Research. It defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
It’s this definition that the Biden administration is relying on to claim we’re not currently in a recession.
“The technical definition is not two negative quarters,” White House economic adviser Brian Deese said recently. “Technically, the definition is the NBER’s definition.”
So what will the NBER say? Probably nothing for quite a while. Although the NBER called a recession quickly in 2020, it typically is slow to declare that a recession has begun. When it does get around to deciding, the question will be complex. Two quarters is six months, which certainly qualifies as “lasting more than a few months.” The current downturn is spread across the economy, hitting both services and manufacturing, and is visible in real GDP, industrial production, and wholesale-retail sales.
The tricky part is employment. The economy continues to add hundreds of thousands of jobs each month. There are 11.3 million job openings, around one and half times as many as we ever had before the pandemic. Jobless claims have been rising lately, but the latest figures are around what we would expect in an expanding economy. The unemployment rate is 3.6 percent, a level so low that many economists think it is unsustainable.
Can we have a recession with a robust jobs market? Maybe. But it will be unlike any recession we’ve ever had before.
It’s unlikely that the recession began in the first quarter of this year, even though the economy contracted. Most economic indicators were positive in the January through March period. The economy shrank because businesses had overstocked inventory in the traditional 2021 holiday season, and demand for goods from U.S. consumers was so strong—especially compared with the rest of the advanced economies of the world—that our trade deficit soared. Trade and inventories are particularly volatile, and big shifts are not always indicative of the overall direction of the economy.
That said, the broader economy has lost momentum in the second quarter. It’s not unlikely that the NBER will decide to date the start of the recession with the April through June quarter. It seems quite likely that it will decide—maybe sometime next year—that a recession began sometime this year.
However, in a White House blog post, the Biden administration attempted to rule out the idea that we could be in a recession by pointing to a guideline economists call the Sahm Rule:
A widely cited indicator of recessions (the “Sahm rule” named after economist Claudia Sahm) maintains that a recession is likely underway when the three-month moving average of the unemployment rate rises by at least half a percentage point (50 basis points) relative to its lowest point in the previous 12 months. The fact that the Sahm indicator is 0, far below its 50 basis-point threshold, provides yet another indication that the economic expansion is ongoing.
Sahm is a brilliant economist whose ideas helped America respond to the pandemic in a way that made the U.S. economy much more resilient than many of our peers. The Biden administration, however, is misusing the “Sahm rule” here. Sahm said so herself in a tweet yesterday:
Although the Sahm rule is sometimes referred to as the Sahm Rule Recession Indicator it is better thought of as a real-time signal for when the government should step in to provide direct economic aid to households in the event of rising unemployment. This may be a heuristic for recessions but it is not a bright line rule.
Sahm hits on another important point here. The debate over whether we are in a recession is absurd. Very often when the establishment media or ruling party want the public to stop paying attention to something they decide to direct the conversation toward arguments about the technical definitions of terms or the processes for evaluation. The hope is that everything gets so boring or complicated that everyone will stop paying attention.
That’s not going to work this time because it is painfully obvious that the economy is not doing well—even if the NBER eggheads haven’t declared a recession yet. Consumer sentiment is near record lows. Inflation is at four-decade highs. Wages cannot keep up with rising prices. The Federal Reserve has found itself behind the curve and struggling to play catch up by raising interest rates at a record pace. Business optimism has crashed.
There are plenty of jobs but not a lot of hope or happiness. Whether this is a recession or not is literally an academic question. Maybe we should just call it a Bidenpression.
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