Andrew Kelly | Reuters Everyone who cares knows that recessions occur when there are two consecutive quarters of negative growth — everyone, that is, except the people who actually decide when the economy is in recession. For these folks at the National Bureau of Economic Research, the definition of a recession is much more complicated. Officially, the NBER defines a recession as “a significant decline in economic activity that is spread throughout the economy and lasts more than a few months.” Bureau economists, in fact, claim they don’t even use gross domestic product, the broadest measure of activity, as a primary barometer. That’s important because data coming Thursday could indicate the U.S. saw its second consecutive period of negative growth in the second quarter. Although every period since 1948 of two consecutive negative quarters has coincided with a recession, that may not be the case this time. Why; It’s complicated. “The NBER would be ridiculous if they said we were in a recession when we were creating 400,000 jobs a month,” said Dean Baker, co-founder of the Center for Economic and Policy Research. “I can’t even imagine they would think for a moment that we’re in a recession.” Indeed, nonfarm payrolls rose by an average of 457,000 a month in the first six months of the year, conditions hardly associated with an economic downturn. Additionally, there are 11.3 million job openings and just 5.9 million workers available to fill them, indicating that hiring should continue to be strong.
The case of recession
But there were also downsides. Consumer spending in dollar terms was steady, but when adjusted for a 40-year high for inflation it was much less. The US trade deficit hit a record high in March, another negative for GDP. Stockpiles have lagged, which is also hurting growth as measured by the Bureau of Economic Analysis. To the public, however, these are just details left for economists to figure out. If the second-quarter GDP number is negative and reporters and the White House don’t call it a recession, it’s sure to spark confusion and perhaps anger from those hurt by rising inflation and a clear slowdown in parts of the economy. After all, there are many things that make it look like a recession: high prices, widespread product shortages, and warnings from companies like Walmart that profits are shrinking due to changing consumer habits, to name just three. GDP shrank 1.6% in the first quarter, and the Atlanta Federal Reserve’s real-time tracker shows the same decline for the second quarter. “I think it’s still just a game of semantics. The trajectory of the economy is clearly lower, whether we’re going to define it as [a recession] or not,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “If anything, the third quarter will show further weakness. So you could have three quarters in a row of GDP contraction. Does that technically mean we’re in a recession?’
The criteria
For its part, the Cambridge, Mass.-based NBER is a bit of a shadowy group, meeting privately and generally not making recession calls for months after they start and sometimes not until after they’re over. Her most recent appeal stemmed from the Covid recession, which she said began in February 2020 and ended two months later. However, the government and most business news outlets treat the NBER’s decisions as gospel when determining expansions and contractions. The agency is generally believed to use six factors: real personal income minus transfer payments, nonfarm payrolls, employment as measured by the Bureau of Labor Statistics household survey, real personal consumption expenditures, sales adjusted for price fluctuations, and industrial production. The NBER did not respond to CNBC’s request for comment. “If this definition seems involved, that’s because it is,” Tim Quinlan, senior economist at Wells Fargo, said in a client note. “Defining a recession is not easy and extends beyond the duration of a simple recession to how deep and widespread it is throughout the economy.” Quinlan said the data points can be divided into four broad groups: output, income, employment and spending. “The economy has never been in a recession when at least three NBER indexes rose during the month,” he said. “While we still don’t have real sales until May, non-farm employment, real personal income minus transfers, and industrial production rose during the month, suggesting the economy is not yet in recession.” If the NBER doesn’t declare a recession soon, the next question will be what comes next. Boockvar sees the recession as inevitable, with the NBER statement just a matter of time. “I wouldn’t be surprised if their recession start date was a little later,” he said. Like many others, Baker fears that the Federal Reserve’s rate hikes aimed at controlling inflation and slowing the economy could go too far and trigger a recession in the future. But he is confident that the conditions from the first half show no sign of a recession. “We were down in the first half? That makes no sense,” Baker said. “The NBER people, I respect them as serious economists. There’s no way they’re going to say it’s a recession.”
