The rising talk about the U.S. falling into a recession is 90% politics, 10% economics. With an important midterm election coming up in November, Republicans are gleefully and prematurely tarring the economy with the R word while Democrats are sticking with their story that jobs are what matter most to the American people.
Battered by high inflation, supply shortages and higher interest rates, the economy is slowing and households and businesses are struggling, but it is not quite in what economists would call a recession, despite the false alarm from the report Thursday that gross domestic product has declined for two quarters in a row.
The old rule-of-thumb that two negative quarters in a row equals a recession isn’t an iron-clad rule. A recession is defined by more than a single number. GDP often sends false signals about the underlying health of the economy that run counter to other, more timely facts, such as the incredibly strong labor market and robust consumer spending on services.
Federal Reserve Chairman Jerome Powell, the president’s Council of Economic Advisers and the majority of business-cycle economists all agree that the economy has not yet met the definition of a recession.
Naturally, you have a lot of questions: Is the economy in a recession? Will the inflation rate ever come down? Will you lose your job? Is it Joe Biden’s fault?
The answers are: Not yet, not right away, hopefully not, and not really.
Right on the economics, wrong on the politics
First, let’s dispose of the idea that the economy could already be in a recession, based on the minus 1.6% growth in the first quarter and the 0.9% decline in the second quarter.
Many people falsely believe that a recession is defined by two straight quarters of negative GDP growth. But that’s not the commonly accepted definition, nor does it fit current conditions, because the U.S. economy is far too complex to be defined by just one number.
“ The Democrats are completely correct on the economics when they say that the economy is not currently in a recession, but they are completely wrong on the politics. The Democrats sound like they don’t understand how people are suffering now under high inflation and are anxious about their future. ”
Two negative quarters aren’t sufficient to call a recession, especially if monthly data such as employment are growing robustly.
It’s not a matter of “Biden moving the goal posts” as the partisan right-wing media say; it’s simply the way recessions have been defined for more than 40 years, under Republican and Democratic administrations. The ones who are moving the goal posts for political advantage are the ones who are cheering for recession, not Biden’s team.
It’s a bit late for Republicans to be claiming they are the Reality Party. But we all know why they are so keen to get everyone to believe a falsehood: There’s an election coming up, and they’d like to be able to say that Biden and the Democrats are presiding over not only high inflation but a recession as well. The Republicans are trying to paint the Democrats in the worst light possible while the pretending that they aren’t still covering up an attempted coup last year.
The Democrats are completely correct on the economics when they say that the economy is not currently in a recession, but they are completely wrong on the politics. The Democrats sound like they don’t understand how people are suffering now under high inflation and are anxious about their future.
From Barron’s: Yellen: Economy is slowing, but it’s not in a recession
Instead, it seems like the White House is trying to get off on a technicality. It’s odd that Biden doesn’t understand this, because he was supposed to be the empathizer-in-chief, the working-class guy who knew how the common folk feel when they sit at the kitchen table and try to pay their bills. But for a year he’s tried to deflect the blame for inflation instead of letting the buck stop on his desk as a leader must. Even when problems aren’t the president’s fault, they are his responsibility.
Biden forgot the first rule of politics in today’s America: The only politician who is allowed to feel sorry for himself is Donald Trump.
The two-quarter myth
Here’s what the Democrats get right about the economics and the Republicans get wrong: A recession is officially defined as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” For decades, economists, the media and the government have all accepted the judgment of a committee of independent and nonpartisan economic historians at the National Bureau of Economic Research, which examines a wide range of economic indicators, particularly employment, sales, incomes, and industrial output to determine whether the economy is contracting.
So far, those economic indicators show that the economy is still growing—for now. The GDP was negative in the first quarter on a technicality, but we all know the economy was strong because sales and output grew while 1.6 million jobs were created, the fifth-best quarter for job growth in U.S. history.
GDP fell in the second quarter primarily because inventories at U.S. businesses grew at a much slower pace. Slumping inventories cut 2 full percentage points off growth, enough to offset healthy consumer spending.
And in the second quarter, more than 1 million jobs were created for just the 20th time in U.S. history. Some recession!
But the economic data also show that the economy is slowing, and many forward-looking indicators hint clearly that a recession could happen soon, as I wrote last week.
Now is not the time for a president to ignore the people’s fears. Now is the time to acknowledge the hand that’s been dealt and make a plan that helps people replace their fears with hope. Now is the time to fight for a better future, not to engage in hairsplitting semantics.