By Mike Walden
The big news in the economics world is a question: Are we already in a recession? While a future recession has been talked about for months, the issue is becoming more prominent with many economists raising their predictions of a recession occurring later this year or next.
But some economic analysts are going one more step. They’re saying a recession is already here. Why are they saying this?
Before giving an answer, some background on the definition of a recession is needed. The federal government actually “farms out” the dating of recessions to an economic think tank, the National Bureau of Economic Research (NBER). Despite its official-sounding name, the NBER is a private outfit. Its unique characteristic is that it has been around for over 100 years.
NBER defines a recession as occurring when there is a “significant decline in economic activity” that lasts for “more than a few months.” This is a rather broad, non-specific definition that gives the NBER wide latitude in defining a recession. The NBER says it looks at several measures of the economy in concluding if a recession has occurred.
There is, however, a “rule of thumb” definition of a recession. The “rule” is that a recession occurs when a broad-based measure of the economy — called “gross domestic product (GDP)” — declines for two consecutive quarters, that is, six months.
“OK,” you may be saying, now translate GDP. GDP is the monetary value of all goods and services produced for sale to “final users” in a specific period of time. Final users are those who consume the good or service rather than reselling it. Basing GDP on final users avoids counting inputs multiple times as they move through the supply chain. For example, we wouldn’t want to count the value of the wood used in a home’s construction once when the tree is cut, a second time when the wood becomes lumber and a third time when the home is sold. Instead, the value of the wood is included in the home’s sale price.
Also, in comparing GDP from one time period to the next, the dollar values are adjusted to remove the impact of general inflation. This eliminates the possibility of GDP rising just because prices are higher.
Now let’s get back to the idea that a recession may already be upon us. The federal government has already released the data for GDP in the first quarter (January, February and March) of 2022. The GDP growth rate was negative for the nation as well as for most of the states, including North Carolina. For the nation, the “annualized” growth rate was -1.6%, and for North Carolina the “annualized” growth rate was -1.4%. Only four states — Massachusetts, Michigan, New Hampshire and Vermont — registered positive growth rates for GDP.
Remember, it takes two consecutive quarters of negative growth in GDP to meet the “rule of thumb” of a recession. Official GDP numbers for the second quarter of 2022 won’t be released until the end of July. Still, there are forecasts available now for the second quarter rate. One of the most respected forecasts is from the Federal Reserve Bank of Atlanta. Their current forecast shows the second quarter GDP rate at -2.1%.
With consecutive quarterly GDP growth rates of -1.6% and -2.1%, the standard often applied to declare a recession would be met. Thus, if the Atlanta Fed’s forecast is correct, we may already be in a recession.
But if we already are in a recession, why doesn’t it feel like one? Hiring is still occurring, the jobless rate is low and consumers continue to spend.
A big reason is directly related to how the quarterly changes in GDP are reported. Notice I referred to them as “annualized” changes. An annualized change takes the actual quarterly change and assumes it would continue for a full year. The federal government — specifically the Bureau of Economic Analysis — likes to report all changes as if they are occurring for a full year. This means the reported annualized change in national GDP in the first quarter of 2022 is derived by taking the actual quarterly change and assuming that same change would continue for a full year (four quarters).
The actual quarterly decline in first-quarter GDP was less than one-half of 1% (specifically, -0.4%) for the nation and close to one-third of 1% (-0.35%) for North Carolina. And if the Atlanta Fed’s forecast of an annualized change in GDP of -2.1% in the second quarter happens, it would actually be a drop of only one-half of 1%.
These numbers do not diminish the adverse impacts of a recession if one were to occur. Yet they do suggest if we are already in a recession, it is — thus far — likely very modest.
While these comments may ease some worries, they do not mean we are “out of the woods” for a bad recession. An alternative scenario is we are not in a recession now, but after the Federal Reserve raises interest rates significantly in the coming months, we will enter a bigger downturn later this year. We’ll have to wait to decide.
Walden is a Reynolds Distinguished Professor Emeritus at North Carolina State University.
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