The US economy just experienced its second quarter of negative growth. Is it in a slump?

The US economy just experienced its second quarter of negative growth. Is it in a slump?

The US economy just experienced its second quarter of negative growth. Is it in a slump?

The US economy shrank by 0.9 percent in the last three months.

The economy has contracted for the second quarter in a row. GDP, or gross domestic product, fell by 1.6 percent year on year in the first quarter.

While two consecutive quarters of negative growth are commonly regarded as a recession, there is no official definition. The National Bureau of Economic Research, a non-partisan nonprofit organization, determines when the US economy is in a recession. That determination is made by an NBER committee of eight economists, and many factors are considered.

The White House has resisted labeling the current economy a recession. It is undoubtedly aware of the importance of the economy in the upcoming midterm elections.

President Biden cited record job growth and foreign business investment as indicators of economic strength. “To me, that doesn’t sound like a recession,” Biden concluded.

Can there be a recession when so many jobs are being created?

In a recent appearance on NBC’s Meet the Press, Treasury Secretary Janet Yellen stated that while two consecutive quarters of negative growth is generally considered a recession, the current economic conditions are unique.

“Creating nearly 400,000 jobs per month is not a recession,” she said.

Regardless of how you slice it, the economy has weakened.

Businesses had retrenched, according to the GDP report. Borrowing has undoubtedly become more expensive as the Federal Reserve raises interest rates. As a result, there is less money to invest. The main concern is whether this will have an impact on job growth.

Retailers were spending less because they had a surplus of inventory to work through. And, as mortgage rates rise, the housing market, which has been hot during the pandemic, is beginning to cool.

There were, however, some bright spots. Wages continued to rise, and people treated themselves by eating out at restaurants and traveling. Overall income increased.

However, recession fears have grown significantly as the Fed continues to aggressively raise interest rates to combat high inflation.

And the economic data has been conflicting.
During previous downturns, for example, the economy was losing jobs. However, as Yellen pointed out, the US economy has been adding jobs month after month.

“This is not a recessionary economy,” Yellen said. “A recession is characterized by widespread economic weakness. That is not the case right now.”

Yellen also mentioned consumer spending, which has remained strong, as well as positive data on Americans’ credit quality.

The term “recession” does not sit well with the White House.

The White House has been careful to emphasize that two-quarters of negative growth does not automatically imply that the economy is in a recession.

The White House is acutely aware of the optics of a country in recession, where Americans are struggling financially, as the midterm elections approach. But, with the cost of so many things skyrocketing and inflation at a multi-decade high, many Americans are already feeling the pinch.
According to a recent Morning Consult/Politico poll, the majority, or 65 percent, of registered voters believe we are already in one.

What are the indicators of a recession?

According to the NBER, a recession is “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

Employment is a factor in the group’s calculations, and the labor market has remained strong. The unemployment rate remained stable in June at 3.6 percent, close to its pre-pandemic low, and the economy added 372,000 jobs.
“I don’t think the NBER would look at the data right now and say the economy is in a recession,” says Michael Gapen, Bank of America Securities’ chief U.S. economist.

But it’s unclear how much Americans care whether or not the current economy meets a specific, highly technical definition.

Parts of economy are slowing already

The economy is slowing, prices are rising at the fastest rate in decades, and the housing market has begun to cool as the Fed raises interest rates aggressively. The central bank raised interest rates by three-quarters of a percentage point on Thursday.

Economists acknowledge that the headline number on Thursday — how much the economy grew or shrunk in percentage terms — will likely garner the most attention, but they emphasize the importance of delving deeper into the underlying data.
“When looking at GDP, it’s the pieces of the puzzle that matter,” says Michelle Meyer, US chief economist at the Mastercard Economics Institute.

We’ll see, for example, if household spending, which accounts for 70% of total economic activity, has kept pace with inflation.
However, as Fed Chair Jerome Powell and other policymakers have acknowledged, sentiment and expectations matter at a time when there is so much uncertainty and so many Americans are experiencing economic pain, and the key for the economy is not to lose too many jobs.

“I think a lot of it boils down to jobs,” Meyer says. “Whether or not you have a job. Whether or not you expect to keep your current job. And what that might mean for your future earning potential.”

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