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Capital Comments: Is this a Recession?

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Is this a recession? Real gross domestic product has dropped for two straight quarters. Real GDP is our measure of goods and services produced, adjusted for inflation, and the United States is producing less now than it was at the end of 2021. Usually that’s exactly what we mean by a recession.

But is this a recession? The economy has added almost 3 million jobs in the past two quarters. The unemployment rate is 3.5 percent, matching the pre-COVID rate in 2020, which was the lowest in 50 years. That sounds more like a boom than a recession.

Recessions are marked by peaks and troughs. The economy hits a high point, a peak, then starts to decline. When it hits a low point and starts to recover, that’s a trough. The time between a peak and a trough is a recession. The time from trough to peak is an expansion. Peaks and troughs are marked by the National Bureau of Economic Research, in Cambridge, Massachusetts. So many people use their recession dates that they’re often called “quasi-official.” The economists at the NBER don’t call recessions as they occur. They usually wait for months to make sure. They haven’t called this a recession, at least not yet.

To the NBER, a recession is a significant decline in economic activity spread across the economy. They watch a number of indicators to determine recessions, including inflation-adjusted income less government payments, business payroll employment and household survey employment, consumer spending and business sales, both adjusted for inflation, and an index of industrial production. If all of these are declining, it’s surely a recession.

Here's what these indicators are saying. Income less government payments rose in April and May but fell in June. Payroll employment is increasing a lot. Household employment hasn’t changed much since March. Consumer spending and business sales are both down a little since April. Industrial production hit a new peak in July. So, two strong increases, three slight declines and one indicator unchanged. That’s unlikely to persuade the NBER that we’re in a recession.

Real GDP has fallen two quarters in a row, though. That’s not the NBER’s definition of a recession. Real GDP isn’t even on its list of indicators. But almost always, when there’s a two-quarter drop in GDP, the NBER eventually calls it a recession.

The exception occurred in 1947. Real GDP fell in the second and third quarters, but employment was increasing and the unemployment rate averaged 3.6 percent for the year. Just like now.

In 1947 the economy still was adjusting to normal after the disruption of World War II. They called it “reconversion,” switching production from military equipment back to civilian products.

It took a few years, and while it was happening the usual economic measurements looked strange. GDP fell, employment rose, and by the way, inflation averaged near 10 percent a year.

Our economy is trying to adjust back to normal after the disruption of the COVID pandemic and lockdown. Once again economic measurements look strange. Employment is rising and GDP is falling. Usually employment and GDP rise and fall together. If more people are working, they should be producing more goods and services. How can more employees produce less?

Here’s a possibility. Workers are scarce. Businesses have a hard time finding employees. According to the Bureau of Labor Statistics, there are 10.7 million job openings but only 5.7 million people looking for work. Businesses are short 5 million employees.

Suppose sales go flat and businesses cut production, but they don’t lay off their workers, because they’re so hard to find. Economists call it “labor hoarding.” Businesses keep their workers so they aren’t caught short once sales recover. Sure enough, average weekly hours worked have been falling since January, even as employment has increased.

We’ve seen several “jobless recoveries.” Often, in the first year after a recession, GDP rises but the economy doesn’t produce enough new jobs to bring the unemployment rate down. People are right to ask, is a jobless recovery really a recovery at all?

Now we have the opposite problem. Maybe we could call it a “working recession.” And maybe a working recession isn’t really a recession at all.

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