The U.S. economy shrank at an annual rate 0.9% from April through June, the Bureau of Economic Analysis estimated on July 28, 2022. It follows a contraction in gross domestic product of 1.6% recorded in the first quarter of the year.
Some observers suggest the two quarters of contraction constitute a “technical recession” or the “unofficial start” of one, while others suggest it at least raises fears or signals it’s on the way. Federal Reserve Chair Jerome Powell apparently thinks otherwise. On July 27, after raising interest rates 0.75 percentage point, Powell told reporters, “it’s a strong economy and nothing about it suggests that it’s close to or vulnerable to a recession.”
Confused about whether the U.S. is in a recession or how to know when one hits? If you are, join the club.
So The Conversation U.S. asked Brian Blank, a financial economist at Mississippi State University, to explain what’s going on in the economy and what factors determine if it is in recession.
What did the latest GDP report tell us?
The economy is really hard to pin down right now.
First, the question everyone is talking about now is the release of the less-than-impressive gross domestic product report, which showed a contraction after adjusting for inflation.
Some aspects of the report were positive, such as that consumption – how much people are buying – still rose a little and business fixed investment – how much companies spend on machines and factories – was flat, avoiding the drop previously forecast.
As for some of the more negative news, investment in residential housing and property declined 14%, which makes sense given how much it had been rising since the pandemic upended the housing market. In addition, a drop in private inventory investment – a measure of how much stuff companies have produced but haven’t yet sold – had perhaps the biggest impact on negative second-quarter figures. While inventory reductions can be a sign of strength from selling products, the decline reduced overall GDP by over 2 percentage points.
And overall it means the U.S. economy technically has shrunk for two consecutive quarters, which is why you’re seeing a lot more economists, journalists and others use the dreaded “R” word: recession.
What is a recession, anyway?
Two quarters in a row of contraction is the shorthand journalists and many others use to describe a recession.
In the U.S., however, the economy is deemed to be officially in recession only after the National Bureau of Economic Research, a nonprofit and nonpartisan organization, says it is.
The bureau defines a recession as a “significant decline in economic activity that is spread across the economy and lasts more than a few months.” Its business cycle dating committee, which is composed of eight economics professors, meets to determine when recessions begin and end. It uses three key criteria:
1) How quickly the economy is contracting. 2) How many aspects of the economy are declining. 3) How long the economy contracts.
The NBER defines recessions as the time between the point at which the economy stops growing – the peak – and the point at which it starts growing again – the trough.