US economy’s 2nd consecutive quarter of negative growth – Why the country is not labelling it a recession yet

The US economy shrank in two consecutive quarters leading to fears that America may be in the throes of a recession already, but the official call is still some time away.

The US Commerce Department said on Thursday that the Gross domestic product (GDP), adjusted for inflation, fell 0.2 per cent in the second quarter. The first quarter saw a drop of 0.4 per cent.

The GDP is one of the key indicators for economic output and a fall in its value shows a drop in economic activity. Economists are divided on the best approach to define a recession. The most widely accepted definition for recession is 'two consecutive quarters of declining GDP', which has indeed occurred, fanning fears and sparking commentary.

While experts have not ruled out a recession (in the future) the economy report card for now gives hope that all is not dismal. As many as 2.7 million payrolls were created in the first half of the year (which amounted to an average of about 375,000jobs per months according to the white house statement) which indicates that jobs are a strong point.

U.S. Treasury Secretary Janet Yellen admitted an economic slowdown but refused to acknowledge a recession which she said would be accompanied by “substantial job losses and mass layoffs, businesses shutting down, private sector activities slowing considerably, family budgets under immense strain ... a broad-based weakening of our economy.” “That is not what we're seeing right now,” Yellen told the media.

She said that the prime concern for Americans was inflation and rising costs, not jobs. However, in a market that is overheated by inflation, the real wages earned by those on a payroll too has shrunk. In the US, inflation hit a high of 9.1 per cent in June, its fastest rate since 1981. The inflation trouble in the US dates to the pandemic when government spending to prop up the economy created an unusually high demand. And then, the Ukraine war struck exacerbating the problems caused by jammed logistics chains and supply shortages. Sky-high oil and gas prices due to the war, bad harvests hitting food supplies also inflated household bills.

The US Federal Reserve has been trying to mop up the liquidity in the economy by raising lending rates – it hiked rates by 75 basis points on Wednesday (July 27) and more are expected in September and again later this year. Fed chairman Jerome Powell has said that these will be unusually large increases due to an extremely tight labour market and soaring inflation.

In a tight labour market, an economy is close to full employment so workers are able to negotiate better wages but amid steep inflation, the extra money that they may be receiving is spent on purchasing costly daily needs and gasoline. BBC reports that inflation pushed down the average hourly wage in the US – it was 3.6 per cent lower in June than 12 months earlier.

The Fed is trying to maneuver the economy to achieve a “soft landing” which means to cool down prices enough while staving off a recession. This is getting harder to do as the war drags on, driving up prices of many items, and pandemic-related shortages also continue to ail the economy.

Is it or is it not a recession?

In the US, the official call for recession is made by a panel of economists convened by the National Bureau of Economic Research (NBER) which defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

A White House statement says that NBER studies real personal income minus government transfers, employment, various forms of real consumer spending, and industrial production to arrive at a conclusion on recession and the health of the economy.

While some data on jobs and other factors have allowed the US to evade a recession tag for now, the probability of one is significant. The White House says: Recession probabilities are never zero, but trends in the data through the first half of this year used to determine a recession are not indicating a downturn.

In retrospect, it is possible that experts may decide that the recession began in early 2022 but that is unlikely considering other economic data. In fact, when recessions are short-lived, the committee typically announces them after they are over, notes the White House statement. It is not uncommon that a recession is called as much as a year or more after the fact.