Last week, U.S. government data showed that the economy’s gross domestic product (GDP) declined for the second straight quarter. Prices are rising, putting a squeeze on many Americans. The housing market is still strong, but cooling. But the labor market remains robust. So what’s going on? Are we in a recession?
Pedro Amaral, associate professor of economics at Cal State Fullerton’s College of Business and Economics, says the answer may lie in the difference between popular and technical definitions of what a recession really is.
The Street vs. The Experts: Understanding Recessions
“Part of the debate is simply semantic and stems from the fact that while a street definition of a recession consists of two consecutive quarters of negative real inflation-adjusted GDP growth, which the U.S. economy has experienced in the last two quarters, the more accepted definition depends on the opinion of the National Bureau of Economics’ (NBER) Business Cycle Dating Committee,” explains Amaral. “In addition to GDP growth, the latter considers a broader set of factors, including data on personal income, employment, consumer expenditure, wholesale and retail sales, and industrial production.”
Amaral notes the definitions have tended to converge. Since 1948, every time there were two consecutive quarters of negative GDP growth, the NBER eventually declared a recession. Occasionally, the NBER has made declarations when the street definition wasn’t in place yet. “In 1960-1961 and 2001 the NBER declared recessions even though there were not two consecutive quarters of negative real GDP growth,” explains Amaral.
What Sets 2022 Apart – And Where It Might Be Headed
If we’re in a recession this time around, it has a different character than previous downturns. Amaral notes the historically low 3.6% national unemployment rate as evidence.
When asked to divine the current conditions, Amaral suggests a recession is – eventually – in the offing. “If I had to bet, I would say the NBER will eventually declare a recession. The Federal Reserve’s efforts to fight inflation by increasing interest rates will cool down the economy even further,” he predicts. “Currently, the Federal Funds Rate, the short-term interest rate the Fed influences, stands at 2.25%-2.5%, but the Fed’s owns Summary of Economic Projections has it rising all the way to 3.75% in 2023. The rates at which businesses finance themselves will go up in tandem eventually hurting payrolls. If inflation is stubborn and unresponsive to the Fed’s interest rate hikes, such as if supply-chain problems persist, then interest rates are likely to climb even higher, deepening the recession and causing stagflation.”
For More Information
Cal State Fullerton’s College of Business and Economics provides expert commentary for the college’s business network, academics and the broader Southern California community.
The Woods Center for Economic Analysis and Forecasting provides an annual and midyear comprehensive forecast covering the Orange County, California, U.S. and global economies, along with periodic interim updates. The next forecast is scheduled for Oct. 27 and will discuss inflation, the economic slowdown and geopolitical tensions.
Read more of our article about CSUF economics.
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