The Commerce Department said last week that GDP decreased for the second quarter. The drop indicated that the US economy had satisfied one conventional, if not the informal, standard of a recession. The official judgment about whether or not the US economy is in depression is made by the National Bureau of Economic Research. On Thursday, President Joe Biden said the US is not in a crisis, citing good jobs data.

The issue

According to the National Bureau of Economic Research on Thursday, the United States economy fell for the second time in a row from April to June, exceeding a commonly acknowledged threshold for a recession. GDP fell 0.9 percent on an annualized basis during the period, according to preliminary estimates. This follows a 1.6 percent drop in the first trimester, much worse than the Dow Jones’ predicted 0.3 percent rise. Technically, the National Bureau of Economic Research announces recessions and expansions, but it won’t decide on the current era for months, if not years.

Despite the peculiar circumstances of the decrease and irrespective of what the NBER determines, a second consecutive pessimistic GDP estimate confirms a long-held core notion of recession. GDP is the broadest economic statistic, encompassing the entire level of goods produced and services provided during a given period. “We’re not in a recession, but growth is slowing,” said Mark Zandi, chief economist of Moody’s Analytics. “The economy is at stall swiftness, barely going forward.”

The announcement had minimal impact on markets, with equities opening marginally lower. Government bond rates fell overall, with the most significant declines at the shorter end of that scale. A secondary study released on Thursday revealed that layoffs remain high. As per the Labor Department, initial unemployment claims were 256,000 for the week ending July 23, a 5,000 decrease from the previous week’s upwardly revised amount but more than the Dow Jones forecast of 249,000.

What is GDP?

GDP is the total financial or market worth of all completed goods and services generated inside a country’s boundaries in a specific period. It is a comprehensive assessment of a country’s economic health since it is a broad measure of all domestic production.

GDP is typically estimated annually, but it is also computed quarterly. In the United States, for instance, the government publishes an average GDP estimate for each financial quarter and the entire calendar year. Because the data in this report is presented in actual terms, it has been corrected for price fluctuations and is thus net of inflation.

What is a recession?

A recession is well-defined as an unadorned, widespread, and long-term debility in economic activity. Because downturns can last six months or more, one widely accepted rule of thumb is that two consecutive quarters of a drop in a country’s Gross Domestic Product (GDP) constitutes a recession. Economists, like those at the National Bureau of Economic Research (NBER) that date business cycles in the United States, define a recession as an economic contraction that begins at the top of the former boom and ends at the low point of the subsequent downturn.

Economic production, customer needs, and employment often fall during recessions. The NBER uses measures including nonfarm payrolls, industrial output, and retail trade, among others, to determine the start and conclusion of U.S. recessions, which typically occur months after the peak and trough of the business cycle.

According to the NBER classification, a slump must be severe, widespread, and long-lasting according to the retroactive judgments made by academicians, not a scientific formula designed to detect a recession as soon as it begins. For example, despite its brief two-month duration, the NBER designated the 2020 economic slump induced by the COVID-19 outbreak as a recession due to its severity and breadth.

A widespread slowdown

The drop in GDP was caused by a variety of factors, including losses in stocks, housing, nonresidential investment, and federal, state, and municipal government expenditure. In three months, gross private domestic investment fell 13.5 percent. As measured by personal consumption expenditures, consumer spending grew by just 1% over time as inflation climbed. Over the period, spending on services increased by 4.1 percent, offset by 5.5 percent decreases in nondurable items and 2.6 percent decreases in durable goods.

In the second quarter, inventories, which helped raise GDP in 2021, were indeed a drag on growth, dropping two basis points from the total. Much of the economy’s difficulties were triggered by inflation. In the third quarter, the consumer price index increased by 8.6 percent, the fastest since the fourth quarter of 1981. As a result, inflation-adjusted personal income fell by 0.5 percent, while personal savings fell to 5.2 percent, down from 5.6 percent in the first quarter.

“It was extremely scripted,” Zandi claimed of the report. “The only comforting thing was how significant portfolios were.” They will not have the same impact in the next quarter. Hopefully, people will continue to spend, businesses will continue to invest, and we will escape a recession. “

The recession issue

Following its best year since 1984, the US economy began to weaken at the beginning of this year thanks to a combination of factors. Supply chain concerns were at the heart of the crisis, which was exacerbated initially by the COVID pandemic’s excessive demand for products over services. This was exacerbated when Russia attacked Ukraine in February and, more lately, when China imposed severe shutdown measures in response to a surge in COVID cases. A growing trade deficit and a drop in stocks, which were responsible for much of the GDP growth in the second half of 2021, also weighed on the first-quarter figures.

Now, the economy is dealing with more fundamental issues. Inflation began a steep rise a year ago and afterward surged in 2022, reaching its most significant 12-month gain since June 1981. Policymakers’ sluggish response initially culminated in several of the most considerable interest rate rises witnessed in the United States. Over the last four months, the Federal Reserve has boosted benchmark borrowing rates by 2.25 basis points. Back-to-back 0.75 basis point hikes in June and July were the Fed’s most aggressive two-month raises since the early 1990s when it began using instant rates as its principal policy tool.

“Recent economic data may not paint a consistent picture,” said Jim Baird, portfolio manager at Plante Moran Financial Advisors, “but a second successive negative quarter for GDP offers further substantiation that, at best, economic acceleration continued its marked slowdown.” “The Fed’s road to raising interest rates without causing the economy to enter a recession has become exceedingly narrow.” It’s becoming increasingly likely that it’s already closed. Nonetheless, Fed Chairman Jerome Powell stated on Wednesday that while the hikes are expected to reduce inflation, the economy is not in recession.

The economic slump has also caused political problems for the White House. Following the data release on Thursday, President Joe Biden stated, “It’s no coincidence that the economy is faltering as the Federal Reserve tries to reduce inflation.” “However, even as we face unprecedented global obstacles, we are on the right track, and we will emerge stronger and more secure,” Biden continued. Despite the successive quarters of negative GDP, most analysts do not anticipate the NBER to proclaim an official recession. Since 1948, the economy has never experienced three consecutive quarters of negative growth without being in a recession.

However, Wall Street believes that the economy may enter a depression late this year or next year but is not currently in one. However, this may not be enough to shift the popular view. According to a Morning Consult/Politico poll conducted earlier this month, 65 percent of the respondents, including 78 percent of Republicans, believe the economy is already in a recession.

We still don’t know for sure.

The second-quarter GDP figure aligned the economy with a widely accepted definition of recession. The National Bureau of Economic Research’s Business Cycle Dating Committee is the authoritative judge in such cases. Instead, the NBER defines a recession as “a considerable decrease in economic productivity that is widespread and seems to last more than a few months.” Since 1948, the NBER has called a recession if GDP has declined for at least two consecutive quarters.

The NBER standards

While the NBER is not a household brand, business and government news sources follow the private research organization’s pronouncements when calculating expansions and contractions.

Six variables are said to be used by the organization:

Personal income in real terms with fewer transfer payments. Payrolls from non-farm sources The Bureau of Labor Statistics household survey measures employment. Private consumption expenditures in real terms. Sales have been adjusted to account for price variations. Industrial output.

In a client letter earlier this week, Wells Fargo senior economist Tim Quinlan wrote, “If this criterion feels involved, that’s because it is.” “Defining a recession is difficult because it goes beyond merely the length of a slump to how deep and pervasive it is throughout the economy.”

Following the announcement of the GDP data on Thursday, Quinlan stated that conditions are rapidly reaching the NBER’s standards. “Contending on the detailed explanation of depression will be an even more problematic challenge in light of today’s 0.9 percent drop in Q2 real GDP,” he said. “Yet actual customer expenditure continued to rise, and the labor market remains sturdy.” It is too soon to declare the culmination of this growth, but the time is rapidly coming. “

Political implications

The downturn has now become a political issue. The White House raised eyebrows earlier this month when it issued a blog post asserting that the economy is not in a slump. Critics said that the government was attempting to modify a long-held definition and that the media was complying by mentioning the NBER element. According to the article, “holistic statistics” such as “labor market, consumer and corporate expenditure, industrial production, and earnings” play a role in the true definition of recession. “Based on these figures, it is doubtful that the decrease in GDP in the first quarter of this year, even if accompanied by yet another GDP decline in the second quarter,” the article read.

“Policymakers will undoubtedly be twisting themselves in knots trying to explain why the United States economy is not in recession,” said Seema Shah, chief global analyst at Principal Global Investors. “While two successive quarters of economic contraction technically constitutes a recession, additional timelier economic statistics do not support a recession.” Even if the NBER does not proclaim a downturn in the first half, the economy is still in deep trouble. Higher interest rates, prolonged inflation, and persistently negative sentiment among consumers and companies all represent significant risks in the future. Many economists who doubted the first-half recession now believe one is very likely during the next year or two.

“People are quite pessimistic.” It’s about as black as I’ve ever seen, “said Moody’s economist Zandi. “I’ve never seen anything like that, just anticipating the impending awful economy.” A recession, at its core, is a crisis of trust. Consumers lose confidence in finding work, and companies lose faith in their ability to sell whatever they produce. We lose confidence and enter a recession because the risks are pretty significant. “