The U.S. won't officially be in recession if GDP shrinks again --- and here's why

The U.S. won’t officially be in recession if GDP shrinks again — and here’s why

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Since World War Two the U.S. economy has never shrunk for two quarters in a row without a recession being declared, but an exception to the rule could happen soon.

Gross domestic product, the official scorecard for the economy, is on track to contract in the recently ended second quarter. GDP also declined at a 1.6% annual rate in the first three months of 2022.

Typically two straight quarters of economic contraction is considered a recession, at least unofficially, but an “official” declaration of recession is not so cut and dry.

For one thing, GDP is a complicated report whose headline number sometimes gives off an inaccurate portrait of the economy.

Take the first quarter. GDP contracted largely because of a record U.S. international trade deficit.

Americans bought piles of imports while businesses that were suffering from chronic shortages of supplies put in bigger orders for foreign goods to make sure they had enough on hand later in the year, pushing up inventories.

The surge in demand for imports was not a sign of a slowing economy. Consumer spending and business investment, the two main pillars of the economy, both rose. GDP would have been positive had the international trade deficit not exploded early in the year.

At the same time, the U.S. economy has been steadily creating hundreds of thousands of new jobs each month and the unemployment rate has held steady at 3.6% — just a hair above a 54-year low.

These are some of the details that won’t escape the attention of the group of eight economists in the U.S. entrusted with determining when recessions begin and end.

These economists, mostly unknown to the public but prominent in their field, work for an organization called the National Bureau of Economic Research. The nonprofit organization was founded in 1920 and is funded by government and private contributions.

The NBER economists take in a wide range of factors to determine if a recession occurred, but they pay special focus to hiring, unemployment, manufacturing, and income and spending adjusted for inflation.

None of those indicators clearly show the U.S. slipping into recession — and some such as strong job growth argue against it.

The NBER defines a recession on its FAQ page as a “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

But the NBER also indicates a downturn has to be deep, broad and long lasting before it declares a recession.

A lot could change, of course, before the government on July 28 officially reports second quarter GDP. Several key economic reports for the period covering April to June have yet to be released, especially the critical U.S. employment for June.

Economists polled by The Wall Street Journal predict the U.S. gained a healthy 250,000 new jobs to keep the unemployment rate at 3.6%.

The finally flurry of data could show economic growth was somewhat stronger than it seemed — and get the NBER off the hook.

For now. More and more economists predict a recession or something close to that is likely by next year.

“Whether we get a classical recession is still an open question, even though the hit to growth will feel like a recession,” said Steven Ricchiuto, chief economist at Mizuho Securities.

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