Falling GDP Over 2 Successive Quarters Not Technically Recession: White House
The White House dropped a new framework on how to perceive the economy. After having described the 9.1% inflation rate as a lagging indicator two weeks ago, the new take is that defining a recession is far more complicated than it meets the eye.
Yesterday’s White House blog post doesn’t come as a surprise. Last month, Financial Times surveyed 49 macroeconomists, of which 68% thought that we will hit recession by 2023. Last Wednesday, Bank of America (BofA) tweaked its economic forecast, which includes recession on the roadmap this year as well.
Outside of direct prognostications, there are also observable recession signals. For instance, fund managers have stockpiled cash at record levels, not seen since the Great Recession of 2008. This is typically done to weather through a recession, given that free cash flow helps mitigate unforeseen financial woes.
White House Stance on Defining Recession
Just a month ago, we explained that the non-partisan National Bureau of Economic Research (NBER) is officially in charge of making the recession call, based on a confluence of macroeconomic factors. The White House covered the same ground, pointing out the following factors that go into recession calculus:
- Employment rate – unemployment remained steady at +3.6% for 4 consecutive months, while payroll employment grew at a +4.7% annualized rate.
- Real personal income minus government transfers – increased by +1.8% year-over-year.
- Real consumer spending – increased by a +3% annualized rate in Q1.
- Industrial production – decreased by -0.2% in June, while increased by +6.1% for Q2.
These four factors may come as lagging indicators, just like inflation because they are also based on government statistics. Inflation itself is not included directly, given that real income and spending already cover that ground.
In other words, the NBER committee would have to conclude a significant decline on that chart. This is regardless of the GDP contraction this year by -1.6%. The U.S. Bureau of Economic Analysis (BEA) is scheduled to release the next GDP report (Advance Estimate), on July 28th. If it is also negative, that would constitute two consecutive contracted quarters, colloquially defining a recession.
In short, it is the White House’s position that this colloquial definition of a recession is out of step with the four indicators that NBER uses. In other words, the two-quarter GDP shrinkage would constitute a “technical recession”, instead of a real one based on in-depth economic factors.
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The Role of Perception
At first glance, it may seem that the White House post is another case of a “transitory inflation” moment, made a year ago when inflation was twice as low as today and double the Fed’s original target of 2%. In other words, a political coping mechanism, but this time for the recession.
However, a case could be made, based on the above statistics, that technical recession doesn’t depict the true state of the economy. The problem is, that much of the economic activity is driven by sentiment. After all, every word from FOMC minutes is scrutinized, true meaning deciphered, which then triggers the market to react one way or the other.
The dependency of the equity market on the Fed has only grown stronger since it was depicted as an “unhealthy addiction” 12 years ago. So far, the Fed’s interest rate hikes have exerted double-digit negative pressures on the market, as the Fed tightens its focus on reducing 40-year high inflation.
By the same token, this itself suppresses consumer demand which tends to lower prices. Likewise, the perception of “technical recession” is poised to do the same. After all, recession – as a suppressed demand that cools an overheated economy – has a 100% historic success rate in lowering inflation.
By framing the technical recession as not the real deal, the White House is politically saving face, while still counting on the perception of recession to lower inflation.
The difference between a technical recession and a real one is the difference between a “soft” and “hard” landing. In which plane do you think the economy is seated? Let us know in the comments below.