Last week I joshed that we’re trying so hard to talk ourselves into a recession that we should just crater the economy now and get it over with.
Everybody listened to me!
Unexpected slowdowns in incomes, spending, private investment and manufacturing activity have raised the intriguing possibility that GDP growth for the second quarter will be negative instead of positive. In just a few days, that new data flipped the Atlanta Federal Reserve’s GDP Now forecast from 0.3% growth in the second quarter, which ended June 30, to a 2.1% decline. GDP dropped 1.6% in the first quarter, so if the Atlanta Fed forecast is right, we’d now have two consecutive quarters of shrinking GDP. The official figures for second-quarter GDP growth arrive on July 28.
Back-to-back quarters of shrinking GDP used to be the popular definition of a recession. The group that formally determines the start and end dates of a recession, the National Bureau of Economic Research (NBER), now has a broader definition: “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” But if the economy has shrunk for two quarters in a row, that might meet the NBER’s definition and we might be in a recession right now. “It’s (unofficially) a recession!” economist Ed Yardeni declared in a June 30 research note.
That would be awesome! Recessions often sneak up, and the NBER, prioritizing accuracy over speed, typically doesn’t designate the start date of a recession until much later. The “Great Recession,” for instance, began in November 2007, when the unemployment rate was a fairly low 5%. Nobody knew it at the time, however. The NBER didn’t call that recession until a year later, after the 2008 financial crash made clear to everybody an epic wipeout was underway.
There’s one powerful reason to argue NO WAY NO WAY NO WAY are we in a recession: The hot labor market. The unemployment rate has fallen from 4% in January to 3.6% now, which is close to the 52-year-low of 3.5%. There are still twice as many job openings as unemployed people in the U.S. economy. Since 1948, the unemployment rate has never fallen during the beginning of a recession. It normally rises, because businesses get worried about a slowing economy and stop hiring.
Yet there’s no obvious post-war parallel to what’s happening in the U.S. economy right now. There was high inflation, like we have now, in the 1970s and early 1980s. But in modern history there’s never been an analog to the COVID pandemic and its dramatic distortions of supply and demand. Consumer demand for certain types of goods surged during the pandemic, at the same time supply-chain disruptions made those very goods more scarce. Result: inflation.
But that’s now ponging in the other direction, as demand for goods softens and Americans are now spending on services, such as air travel. Inflation is sloshing from goods to services and there are now acute shortages in the service sector, which is why airlines lacking enough workers are canceling flights and stranding passengers.
Energy prices are another wild card causing economic models to short-circuit. Gasoline and other energy prices are near record highs largely because of Russian President Vladimir Putin’s invasion of Ukraine. That’s pushing up the cost of food, manufactured goods and other products that require energy to produce and transport. But those same high prices are causing “demand destruction,” which is people cutting back on purchases because prices are too high. That’s … recessionary.
The Federal Reserve, meanwhile, is aggressively trying to slow the economy, and even Fed Chair Jay Powell says the Fed might screw up and go too far, causing a recession. Even if it does, Powell says, that’s a fair price to pay for bringing inflation way down from the current 8.6% level.
Best recession ever?
But if we’re already in a recession, it might be the best recession ever, because somehow we managed to have a downturn without losing any jobs. That would be unprecedented but, who knows, maybe just another head-spinning COVID distortion. Recessions are usually painful but virtuous, because they wring out excesses and take steam out of the economy, bringing destabilizing economic forces back into balance. The pain typically involves a lot of lost jobs. Maybe the pain, this time around, is $5 gas instead of a high unemployment rate. People keep their jobs, their money just gets stretched thin as price hikes exceed wage gains.
There are still plenty of economists who acknowledge the slowdown but don’t think it amounts to a recession, at least not yet. But given how weird the whole economy has become, a recession this time around might be in the eye of the beholder. It’s somewhat subjective to start with, given that the official designation is really just a consensus view of informed experts.
Can a here-and-now recession help Biden? Absolutely. Biden is flailing on the economy because there’s almost nothing he can do on his own to tame inflation, and to many Americans the economy seems like an amorphous blob of badness. If Biden could tell voters, 'Yes, we’re in a recession,' he could also say, 'Maybe we’ll be out of it soon.'
Presidents need trigger points to build their narratives around. Biden, lately, has just had a confounding mass of data that doesn’t add up and consumer pain points that negate every statistical improvement in the economy. Talking up the imminent end of the recession would be better for Biden than his defensive insistence that a recession isn't "inevitable."
What voters need to see more than anything is tangible evidence that inflation is turning around. It won’t take a committee of economists to tell people that, since they know what a gallon of gas and a loaf of bread cost in real-time. Recessions usually do have that effect, because consumers and businesses get spooked and demand dries up, bringing prices down. If that’s where we’re at now, it may be the most welcome recession ever.