The big economic question

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The most recent GDP figures — suggesting that the economy has contracted in each of the past two quarters — has sparked a debate about whether the US economy has slipped into recession.

This debate is briefly explained in today’s newsletter. But I also want to explain why some of this discussion is semantic and without much relevance to most Americans. The more important question is simpler: are the economy’s problems likely to worsen in the coming months or will the situation stabilize and possibly even improve?

That question has tangible consequences for people’s lives. It can affect your decisions about buying a home or car, looking for a new job, and whether you need to be more careful with your spending. There is no clear answer, but there is some useful information.

It helps to start with a basic framework: the country’s economic policymakers want weaken the economy, but not too much.

The main economic problem in recent months has been an overheated economy, with demand for goods outstripping supply, leading to the highest inflation rate since the early 1980s. To curb inflation, the Federal Reserve has raised interest rates, which reduces household spending and, in turn, keeps prices from rising as quickly.

“We have high inflation and historically high inflation,” Cecilia Rouse, chair of the White House Council of Economic Advisers, told me and other reporters yesterday. “In order to curb inflation, we understand that the economy needs to cool down.”

But it is very difficult for Fed officials to get the balance right. They are trying to bring about a big enough drop in spending to reduce inflation, but not such a drop that companies cut jobs, unemployment rises and the economy enters a vicious circle.

When people talk about whether the economy is going into recession, the palpable underlying question is whether such a vicious circle is starting. So far that doesn’t seem to have happened. Still, the risks for the remainder of 2022 are significant.

There is no single definition of a recession. An informal definition is two consecutive quarters of contracting gross domestic product (a measure of the economy’s output). With yesterday’s GDP report, the economy met that standard.

However, most economists don’t like the two-quarters definition. They think it is too narrow because it is based on a single economic indicator. Any indicator, even GDP, can be misleading at times.

Right now, GDP may be exaggerating the economy’s problems for a number of technical, temporary reasons related to global trade and corporate inventories, said Mark Zandi, the chief economist at Moody’s Analytics. Another broad measure of the economy, known as gross domestic income, has not fallen in recent months and tends to be less volatile than initial GDP estimates (yesterday’s number was an initial estimate and the government will revise it – perhaps even to a positive number – as more information comes in.)

The volatility of the initial GDP figures is why economists generally prefer a different definition of recession. The National Bureau of Economic Research, a private nonprofit organization, appoints a small standing committee of academic economists who make statements that many other experts consider official. The NBER defines a recession as a significant, sustained, and broad-based decline in economic activity, and committee members tend to wait months for sufficient data to declare that a recession has begun.

(My colleague Ben Casselman wrote a good explanation about recession definitions this week.)

A major reason for doubting whether the economy has already entered recession is the strength of almost all indicators other than GDP. Both consumer and business spending are still rising, as is employment. “It’s hard to imagine how we got into a recession in the first half of this year, when the economy created so many jobs, job openings hit record highs and layoffs nearly hit record lows,” Zandi said.

As you can see in this chart from my colleague Ashley Wu, the last few months of the labor market bear little resemblance to the run-up to other recent recessions:

There is one caveat: professional economists are almost always late in recognizing the start of a recession. Why? They make judgments based on delayed data and, like other people, are prone to irrational optimism.

Historically, when economic forecasters have said the near-term probability of a recession is at least 30 percent, it means that a recession is actually more likely than not. I have referred to that number in the past as the Anxiety Index. What is it now? About 44 percent, according to the most recent Wall Street Journal survey of forecasters. The fear index flashes red.

“Are we going into a recession? We don’t think so yet. Shall we be in one? It’s a high risk,” Joel Prakken, the chief US economist for S&P Global Market Intelligence, told Ben Casselman.

The Fed’s rate hikes – coupled with high energy prices triggered by the Russian invasion of Ukraine and ongoing Covid disruptions around the world – have created a significant opportunity for a vicious circle of austerity and job losses. The Fed, of course, still hopes to avoid that outcome and achieve a so-called soft landing of lower inflation and sustained economic growth. But, as Michael Feroli, an economist at JP Morgan, told my colleague Jeanna Smialek, “The difficulty has probably increased.”

It’s a strange time for the economy. On the one hand, GDP figures seem to have exaggerated the economic weaknesses of the past six months. On the other hand, there are legitimate reasons to be concerned about the economy over the next six months.

Kyler Murray’s homework nixed: The Cardinals removed a controversial clause — which had sparked outrage among fans and pundits alike — from their star quarterback’s new contract.

‘Renaissance’, Beyoncé’s seventh solo album, is out. Unlike the lead up to her last few releases, this one was strangely conventional: She announced the album in advance and dropped “Break My Soul,” a single inspired by 1990s dance music. She even joined TikTok.

Beyoncé’s previous unorthodox ways, including surprising visual albums and exclusivity deals with streaming services, have removed her a bit from the mainstream commercial market. Her last No. 1 single was “Single Ladies” in 2008, despite her continued prestige.

“She is still the leader of the culture,” Danyel Smith, a music journalist, told The Times. “There are people in this world to change the culture, to change the atmosphere.”

For more: The album is the first of three projects she created during the pandemic. And Times critics and reporters debate which Beyoncé album is final.

Yesterday’s Spelling Bee pangram was avalanche. Here’s today’s puzzle.

Here’s today’s mini crossword and a clue: you’re here (five letters).

And here’s today’s Wordle. Then use our bot to get better.


Thank you for spending part of your morning at The Times. See you tomorrow. — David

PS Gilbert Cruzwhose culture recommendations appear in The Morning on Saturdays becomes The Times’ next Books editor.





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