America in recession?

Official data on GDP (cumulative output) for the second quarter (April, May, June) from the US Bureau of Economic Analysis (BEA) will decline on Thursday, possibly both literally and figuratively. Twitter is trembling with anticipation, but more about the definition of a recession than the possibility of a negative number.

As of July 19GDPNow of the Federal Reserve Bank of Atlanta, which uses a methodology similar to that of the BEA, read negative 1.6 percent, same as third BEA assessment economic indicators in the first quarter (January, February, March). Any negative number from the BEA this week would mean the US economy has contracted for two consecutive quarters, adjusted for inflation, population growth and seasonality.

Some experts say two consecutive quarterly declines mean the economy is in recession. Others say this is not necessarily the case, especially when labor markets are strong. Thus, we must wait for the National Bureau of Economic Research (NBER) to evaluate this issue before using the “R” word.

Traditionally NBER names recessions and other phases of business cycles, but only retrospectively and mostly only for scientists. No one actually trades securities or makes policy and waits for his decisions, and voters certainly don’t.

The USC legal definition of a recession is two consecutive quarters of a shrinking economy. Finding the code through the Law Review Bureau Web site returns a total of 17 matches for the word “recession” shown below:

Some cite non-economic events such as the “downturn” of Devil’s Lake in North Dakota at 16 USC 674a. Some mention the economic downturn without defining it. 12 USC 2701, for example, states that “the country is in a severe recession and that the sharp decline in economic activity has led to the unemployment of a large number of workers and reduced the income of many others“. (Remember the italicized part later!) Others, as in 19 USC 2252 and 20 USC 1001, define a recession as “an economic downturn.”

But there is this gem, the Balanced Budget and Emergency Deficit Control Act, passed in December 1985:

This USC section has since been modifiedbut no more specific definition has replaced the definition of recession as negative real GDP for two consecutive quarters, which is also the legal and/or technical definition in United Kingdom, Canadaand indeed the entire civilized world. Note that there is nothing in the 1985 law about employment or NBER.

Of course, many federal laws are now being ignored, so politically inconvenient legal definitions can be expected to be ignored. Call the situation what you will, but the fact remains that the economy has been shrinking for half a year after a strong recovery from the artificial recession caused by Covid-19 in 2020. In the 1970s pop economists like Wilma Soss called such large fluctuations in economic performance due to policy shifts and uncertainty the “sawsaw swing” effect (a term that traders also used to refer to a quick reversal in security prices).

While employment (number of employees) is high (unemployment is low, with U3 by 3.6%), real wages (the inflation-adjusted price of labor) are declining. Traditionally, companies lay off workers during recessions. This time around, workers are keeping their jobs by accepting lower real wages. Both governments and guru consider falling wages to be as clear a sign of a recession as a high unemployment rate.

This inflation-adjusted wage chart from 1979 to the present speaks volumes. Normally, real wages increase during a recession (grey bars from NBER), but they fall sharply after the Great Lockdown Shock of 2020:

Labor force participation The percentage of the working-age population that is working or actively looking for work is harder to analyze, but can also indicate labor market stress. It has made up some losses due to the lockdown but remains below pre-pandemic levels.

The decline of unions and the emergence of more flexible working arrangements may have helped labor markets equilibrate (equilibrate) on price (real wages) rather than quantity (employment). It’s probably a good solution to keep people from having to queue for soup, but it hides the real pain Americans feel when they have to compromise between rent, food and energy. They know the economy stinks right now, and they know who implemented the policies that made it this way.

Traders, politicians, and Twitterers worthy of their desks, positions, and blue checks don’t play with proven definitions for momentary partisan gain. Instead, they are trying to figure out what the GDP figures for the third and fourth quarters might be. This means looking at standard leading economic indicators, EGGleading indicators and/or be creative, such as Wilma Soss did when she discovered that burlap orders were an indicator of underutilization.

Robert E. Wright

Robert E. Wright

Robert E. Wright is a senior fellow at the American Institute for Economic Research. He is the (co)author or (co)editor of over two dozen major books, book series and edited collections, including the AIER collections. The Best of Thomas Paine (2021) and others. Financial exception (2019). He also (co-authored) numerous articles for important journals, including American Economic Review, Business history overview, Independent Review, Private Enterprise Journal, Finance Reviewas well as Southern Economic Review. Robert has taught courses in business, economics, and politics at Augustana University, New York University’s Stern School of Business, Temple University, the University of Virginia, and elsewhere since receiving his Ph.D. in history from SUNY Buffalo in 1997.

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