Yesterday, the Bureau of Economic Analysis (BEA) released the “advance” estimate for Gross Domestic Product (GDP) for the second quarter. It showed that the GDP fell at an annualized rate of 0.9 percent during the quarter, following a decline of 1.6 percent in the first quarter. Two consecutive quarters of decline in GDP is often cited as the “definition” of a recession. The right in general and Fox News in particular jumped on this. Earlier this week, even before the numbers were released, even the supposed “straight” news hosts on Fox were salivating at the prospect of a recession that could be blamed on the Biden administration. Yesterday, after the numbers were released, they put on chyrons such as “U.S. Economy Enters Recession” and “Biden Recession is Here.” When the administration tried to point out that the consecutive quarterly declines was not necessarily a recession, they were accused of trying to redefine the word. Fox News White House correspondent Peter Doocy said on air live that if you looked up recession in the dictionary, this would be the definition given. They’re still making jokes about it today, comparing it to redefining the word woman. But a look at the economic data shows that the “colloquial definition of a recession” is wrong in this case.
The two consecutive quarters of GDP decline being a recession has never been the “official” definition of a recession. It was just a rule of thumb. Whether or not there is a recession is determined by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER). Their definition of a recession is “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 is a more holistic approach than just looking at the GDP and includes what are known as the coincident economic indicators, i.e., the economic variables that move at the same time as the economy. A look at each of these variables shows that they did not decline during the first half of the year, as would happen in a recession:
1. Personal Income Less Transfer Payments
In a recession, real personal income would drop as people lose their jobs. Income growth has generally been positive in 2022.
2. Total Nonfarm Employees
Employment usually falls during a recession as businesses lay off employees. Employment growth has been positive for every month of 2022. Some hosts on Fox have said that is because people now have to work two or three jobs to make ends meet because of inflation. With a loss of employment, the unemployment rate usually rises in a recession but it has remained near historic lows at 3.6 percent. If the economy were in a recession, then Joe Biden would hold a record as having the lowest unemployment rate ever during a recession.
3. Industrial Production
Industrial production usually falls during a recession as production is cut due to falling sales. Although flattening out in the last couple of months, industrial production was up solidly in the first four months of 2022.
4. Manufacturing and Wholesale-Retail Sales
Sales usually fall during a recession as people cut back expenditures due of loss of employment or fear of that. This is the only measure that was down during the first half of 2022. But personal consumption expenditures have been stable and actually up in 2022:
Again, this is a more holistic way to look at the economy than just the single measure of GDP. It allows the NBER to be more granular in determining when a recession occurs in that the data above comes out monthly, as opposed to the GDP, which is reported quarterly. This allowed the NBER to declare that a pandemic related recession occurred from March 2020 to April 2020, something that would not have occurred if two consecutive quarters of negative GDP growth was required.
So if the coincident indicators were relatively positive, why did the economy contract in the first two quarters of 2022, at least as measured by the GDP? The answer is that the economy probably didn’t contract even though GDP growth was negative. That’s due to a couple of quirks in how the GDP is calculated. Here is the breakdown of the GDP growth in the first quarter:
Components of GDP Growth (2022 Q1)
Personal Consumption Expenditures |
+1.24% |
Gross Private Domestic Investment |
+0.93% |
Net Exports of Goods and Services |
-3.23% |
Government Consumption Expenditures and Gross Investment |
-0.51% |
Total Change in Gross Domestic Product |
-1.6% |
As can be seen, the big reason for the decline in the first quarter was the negative reading for net exports. Part of that was do to a negative contribution by exports (-0.55%), which is bad for the economy as it means fewer purchases of U.S. products by people overseas. But that was dwarfed by a surge in imports, which registers as a negative for the GDP (-2.69%). It’s considered negative because it represents money flowing out of the country, which could hurt the U.S. in the future. But that also represents current strength in the economy as that suggests that U.S. consumers have more money to spend on both domestic and foreign products. Take that out and the GDP growth is positive.
As for the second quarter, here is a similar breakdown:
Components of GDP Growth (2022 Q2)
Personal Consumption Expenditures |
+0.70% |
Gross Private Domestic Investment |
-2.73% |
Net Exports of Goods and Services |
+1.43% |
Government Consumption Expenditures and Gross Investment |
-0.33% |
Total Change in Gross Domestic Product |
-0.9% |
Here, trade was positive as exports surged (+1.92%) and imports weren’t as negative (-0.49%). The big culprit in the second quarter was gross private domestic investment. Here, increases in the interest rate slowed residential construction (-0.71%). But the biggest impact was a decline in private inventories (-2.01%). It’s complicated why changes in inventories are counted as part of the GDP. But the decline in inventories is counted as a negative when it could go either way. If this is due to businesses worried about future sales and not keeping inventories up, then it is truly a bad indicator. On the other hand, if it is businesses drawing down inventories due to high sales, then that is a positive sign as the businesses will have to order more goods in the future to replenish their inventories. If it is the latter, then taking the impact of inventories out means the economy would have been positive in the second quarter as well.
I’m going to cut the reporters a break because it would take an economist who knows where to look to pick this up. But they could have asked someone other than Art Laffer or Stephen Moore about this. Interestingly, conservatives decry government spending, but it was down at both the federal and state and local levels for both quarters and had a negative impact on growth.
So the economy has not been in a recession since the beginning of the year. We may eventually have one, but we’re not there yet. The first quarter was probably pretty strong, but things may have slowed some in the second quarter. I know people are being hurt by inflation, but part of that is due to the economy overheating, not being in a recession. That is something that Fox is confusing bigly; they’re calling any economic distress a recession. It’s ironic that since the beginning of the year, they have been complaining about the spending in the American Rescue Plan causing inflation, but now they’re claiming the economy has been in a recession since the beginning of the year. They’re either ignorant or lying; which one, I’ll leave it up to you to decide.