Is US already in a recession? If GDP falls for second quarter, one definition says we are

A key report Thursday could reveal that the nation’s economic output declined for a second straight month, meeting the informal criteria for a recession.

After dropping at an annual rate of 1.6% in the first quarter, gross domestic product – the value of all goods and services produced in the U.S. – is projected to have risen 0.5% in the three months ending In June, according to the median estimate of economists surveyed by Bloomberg.

That would not be a decline, of course, but it’s not far from one. It is also just an estimate, meaning GDP easily could have fallen, and some economists reckon it did.

Amid soaring inflation and aggressive Federal Reserve interest rate hikes, some top analysts have been predicting a downturn is coming for months but few believed it started so early.  

The possibility of another GDP slide raises a few questions.

Are we currently in a recession?              

Most top economists say no. The benchmark of two quarters of falling GDP is just a rule of thumb. Usually, it does coincide with an official downturn, though it didn’t in the second and third quarters of 1947, Goldman Sachs says.

The National Bureau of Economic Research determines when recessions started and ended, usually months later. It defines one as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

To decide if a downturn fits that criteria, NBER looks at employment as well as indicators such as consumer income and spending, wholesale and retail sales, and industrial production.

Employment, likely the most critical gauge, has been robust, with employers adding 372,000 jobs in June, in line with average gains since March. Job gains have slowed since early this year as the U.S. gets closer to recovering all 22 million jobs lost in the pandemic. But job openings are near record levels and companies are still struggling to find workers.

Household income and spending have weakened, especially after accounting for inflation. And industrial production has been losing steam, with factory output falling in June, Wells Fargo wrote in a note to clients.

But overall, those measures are still up on a quarterly basis, not down.

Then why has GDP decreased?

Gross domestic product fell 1.6% in the first quarter mostly because of trade and inventories, two volatile parts of the economy. The nation’s trade deficit widened as U.S. consumers bought lots of imported TVs, clothing, toys and other products while American manufacturers sold far fewer goods to other countries.

That actually shows that U.S. households are in better financial shape than their counterparts overseas but it technically crimps economic growth.

And retailers, manufacturers and other companies added to inventories more slowly, or drew them down, because they had bulked up so much last year to cope with supply chain bottlenecks.

The core of the economy – consumer and business spending – held up well early this year. Consumption rose 1.8%, a slowdown but still a decent showing. And business investment jumped 10%.

Similarly, in the second quarter, slow stockpiling again may push down GDP even while consumer spending rose about 1% while business capital spending dipped.

Will there be a 2022 recession?

That’s probably the more relevant question.

Goldman Sachs sees a 30% chance of recession over the next year and about 50% in two years. Wells Fargo predicts a mild downturn early next year.

Economists surveyed by Wolters Kluwer Blue Chip Economic Indicators see the economy growing 2% this year and 1.1% in 2023, but some economists see weaker gains or even declines.

What would cause a recession?

The federal government pumped hundreds of billions of dollars into the economy last year through stimulus checks and other programs to propel the nation out of the COVID-19 slump.

Such massive government aid has gone away at the same time that inflation is reducing Americans’ purchasing power, Goldman Sachs notes.

Meanwhile, the Federal Reserve has embarked on its most aggressive campaign of interest rate hikes in decades to fight inflation, increasing borrowing costs and making home, car and other purchases more expensive while clobbering the stock market.

Lower stock prices cause many consumers and businesses to spend less.

Could we avoid a recession?

Yes.

Even though some top economists are predicting one, most still forecast a slowdown rather than a downturn.

That’s partly because household finances are healthy, says economist Paul Ashworth of Capital Economics. Household debt costs are about 9% of disposable income, Ashworth notes. That compares to 13.2% in 2007, before the Great Recession.

Also, risky subprime loans account for a much smaller part of debt than they did 15 years ago, Ashworth says.

And households still have a large chunk of the $2.6 trillion in additional savings they built up during the pandemic. So while high inflation and interest rates will likely dampen growth, there’s a reasonable chance they won’t lead to recession.

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