Yes, the U.S. Economy is in a Recession

By at 28 July, 2022, 9:52 am


by Raymond J. Keating – 

The back-of-the-envelope definition of a recession is two consecutive quarters of negative real GDP growth. Well, based on the first estimate of gross domestic product for the second quarter of 2022, the U.S. has slipped into recession, with growth coming in at -1.6 percent in the first quarter (seasonally adjusted annual rate) and -0.9 percent in the second quarter.

It must be noted that the official arbiters of when the U.S. enters into and exits from recession is the National Bureau of Economic Research. However, looking at the post World War II economy since 1948, the NBER has never not called a recession when growth was negative in two consecutive quarters. So, for all intents and purposes, this is a recession.

Source: Federal Reserve Bank of St. Louis, FRED

For those who would push back and say that the labor market doesn’t point to recession, first, employment is an economic laggard. Second, the latest employment report was split. The establishment survey pointed to nonfarm payroll employment gains of 372,000 in June. But the household survey – which surveys households; gathers employment, labor force and unemployment data; and is a broader measure of employment – was ugly. As SBE Council noted, the household survey estimated that “employment dropped by 315,000 in June. For good measure, the household survey showed the labor force declining by 353,000 in June, and those not in the labor force increasing by a rather staggering 510,000. Indeed, the only reason the unemployment rate remained unchanged for June was due to the large drop in the labor force. However, the employment-population ratio declined from 60.1 percent in May to 59.9 percent in June, and the labor force participation rate dropped from 62.3 percent in May to 62.2 percent in June.”

As for this latest actual GDP report, most troubling were the grim second quarter numbers on investment, which spells trouble now and into the future. Real nonresidential fixed investment (or business investment) declined by 0.1 percent in the second quarter (after a gain of 10 percent in the first quarter), with structures investment down by 11.7 percent and equipment off by 2.7 percent. However, intellectual property products investment remained strong, increasing by 9.2 percent.

Residential investment (i.e., housing) declined by 14 percent in the second quarter.

Also, personal consumptions expenditures growth slowed in the second quarter to 1.0 percent, compared to 1.8 percent in the first quarter and 2.5 percent in the fourth quarter 2021. This indicates growing concerns among consumers about where business investment, hiring and the economy are headed.

Besides intellectual property investment, one of the other few bright spots in the second quarter was real export growth registering 18.0 percent. At the same time, it must be noted that trade data has been volatile from quarter to quarter, and generally grim for a few years now.

In addition, changes in private inventories have swung wildly in recent quarters, boosting growth notably in the third and fourth quarters of last year, and subtracting from second quarter growth in 2022. Inventory measures are temporary or transitory, and don’t reflect long-term investment.

This is a recession. Therefore, it would be nice if our elected officials got serious about shifting policymaking away from higher taxes, more regulation and protectionism, and instead, get serious about implementing a pro-growth agenda that will help re-energize the engines of expansion, that is, entrepreneurship and private investment. That means, as SBE Council has said before, substantial and permanent tax and regulatory relief, advancing free trade, as well as reining in government spending.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist. 


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