Why another GDP decline may not mean the US is in recession

The Biden administration is ramping up messaging that two quarters of negative growth do not mean a recession, bracing Americans for a likely tough economic report on Thursday.

Economists say new federal data could show U.S. gross domestic product (GDP) shrinking between April and June, marking the second straight quarter of contraction. That will likely fuel concerns that the U.S. economy is slipping into recession — if it hasn’t already.

“One quarter can just happen for weird quirky reasons,” Matt Darling, employment policy fellow at the Niskanen Center think tank, said in an interview. “But when two or three happen, you’re like, ‘OK, there’s something going on there.’”

President Biden and White House officials are attempting to avert the political blowback of a recession with the midterm elections just a few months away and are also aiming to prevent a bigger knock on the economy from Americans starting to act like there is a recession.

“We’re not going to be in a recession, in my view. The employment rate is still one of the lowest we’ve had in history, it’s in the 3.6 [percent] area. We still find ourselves with people investing,” Biden said Monday, adding he thinks rapid growth will instead become slower, steadier growth.

In recent interviews, Biden administration aides have focused on the technical definition of a recession to insist that months of strong job growth and healthy consumer spending prove a recession is not here yet and may not come at all.

“Certainly, in terms of the technical definition, it’s not a recession. The technical definition considers a much broader spectrum of data points,” Brian Deese, director of the White House Council of Economic Advisers (CEA), told CNN on Monday. “But in practical terms, what matters to the American people is whether they have a little economic breathing room, they have more job opportunities, their wages are going up.”

Economists turn to the National Bureau for Economic Research (NBER), a think tank not affiliated with the federal government, to officially determine when the U.S. is in recession. A special committee at NBER bases those decisions on a wide range of economic data beyond the GDP reports, including job growth and layoff data.

It can be difficult to know if a recession is occurring until it’s already started, which adds to the stakes and intrigue around the Thursday GDP report. But even as growth slows, the labor market is flashing signs of an economy far from hitting a recession.

Job growth and consumer spending have remained strong throughout 2022, with the U.S. adding more than 2.5 million jobs since the start of the year. U.S. households on the whole have powered through inflation by spending more each month on goods and services, which has helped fuel record numbers of job openings and high wage growth. 

“That’s reasonable to say we’re not yet in recession because the job market is pretty strong,” said Desmond Lachman, an economic expert and senior fellow at the right-leaning American Enterprise Institute. “That’s a reasonable argument for them to be making but it’s just, if the economy falls off a cliff going forward, then the job market’s not going to be strong. Some of the job numbers are indicating that the job market is already beginning to cool.”

Despite the currently strong job market, economists acknowledge that the stubborn rise of inflation and the Federal Reserve’s attempts to fight it has brought the U.S. to the edge of recession. 

“Just the fact that you had two negative quarters is, strictly speaking, not a recession but popularly, people will think that will be a recession,” Lachman said. “[But] the outlook is looking pretty grim. Whether people think that the recession began now or a few months earlier, you’re going to get a recession — at least I think — later this year or the beginning of next year.”

While job growth has remained strong, there are undeniable signs that the U.S. economy is starting to slow down.

Layoffs have risen steadily since the Fed began raising interest rates in March as more companies feel the strain of lower sales and tighter profit margins. Factory output has fallen off, business leaders are pulling back plans to hire more workers and home sales have fallen sharply over the summer — which is normally the hottest season for the sector.

The slowing economy and a surge of imports led to negative GDP growth in the first quarter of 2022 despite an increase in both consumer and business spending.

Economists are bracing for another decline in the second quarter. That could prove to be the start of a recession, but economic experts say two quarters of negative growth isn’t enough alone to make the call.

“It’s not the rule of thumb — maybe you call it — that two quarters of negative GDP growth equals a recession. That’s not what a recession is. In a technical sense, the White House is correct,” said Austan Goolsbee, economics professor at the Chicago Booth School of Business who served as CEA chairman under former President Obama.

Goolsbee noted that the downturn caused by the COVID-19 pandemic only lasted two months before the economy began to recover, but is still considered a recession.

A recent CEA blog post outlines how economists determine whether the economy is in a recession, arguing that two consecutive quarters of falling real GDP does not constitute a recession in terms of the “official definition” and “the way economists evaluate the state of the business cycle.”

Experts also agree the current rate of job growth in the U.S. wouldn’t indicate that the country is in a recession.

Goolsbee said it would be a “very weird recession” if the U.S. is in one, which won’t be evident until the NBER assesses it — and that could take several months.

“It is not just about GDP growth. We always look at real income, industrial productivity, unemployment, GDP growth, and a number of other factors,” he said. “It would be an extremely strange recession to be adding 372,000 jobs a month in a recession.”

“The economy on average, in a normal time, is putting up 100, 150,000 jobs a month and we’re putting up double, triple a normal boom time. That’s not what a traditional recession looks like,” Goolsbee added.

There is also an argument for the White House to keep hammering the narrative that the U.S. is not in a recession — and a recession isn’t inevitable — because that type of messaging could prevent a negative impact on the economy.

“That’s the right thing for them to be doing is to try to talk people out of recession, because a recession can become self-fulfilling,” said Lachman, adding people could cut back on spending and worry about losing their job.

Whether the U.S. economy is slowing toward a more normal pace of growth or sliding into a recession remains to be seen. Experts also stressed that GDP data is revised frequently and could eventually show that the U.S. economy never shrunk at all. 

Even so, Darling warned that a recession will continue to be at the front of American minds as long as high inflation, rising interest rates and the shocks created by the war in Ukraine roil the economy.

“I have no idea what the technical definition of an avalanche is. At the same time, if I see a bunch of snow coming down at me, I want to get out of the way,” Darling said.