United States | Recession or not? The debate heats up…

The announcement on Thursday that the gross domestic product (GDP) of the US economy contracted in the second quarter, for the second quarter in a row, has revived the debate on the imminence of a recession. Here is the opinion of five local economists.

While a weak rebound in GDP was expected, after the contraction of 1.6% measured in the first quarter, the second quarter saw another decline of 0.9% at an annualized rate.

In economic theory, the definition of a recession corresponds to two consecutive quarters of decline in GDP. But many economists, as well as the Biden administration, say the U.S. economy is not in recession because of other more favorable indicators, like jobs.

In fact, in the United States, only one body has the authority to officially designate periods of recession. This is the National Bureau of Economic Research (NBER), which takes into account not only the evolution of real GDP, but also several other indicators (see next tab).

To shed light on this debate, The Press collected comments from financial sector economists in Quebec and Canada.

Benoit P. Durocher

Senior Economist, Desjardins

“We are seeing a second decline in real GDP in the US economy, but still no official recession. In fact, the conditions are not met for a recession to be declared by the NBER, with in particular a labor market which is still doing well. Going forward, I expect the US economy to return to positive territory in the next quarter, thanks in particular to a favorable reversal on the [stocks] In the enterprises. With the job market remaining strong, the recent problems in the US economy will not prevent the Federal Reserve (Fed) from continuing its fight against high inflation. I expect further US interest rate increases in the coming months, albeit at a more moderate pace. »

Claire Fan

Economist, Royal Bank (RBC)

“The second consecutive decline in quarterly GDP in the United States is not considered a recession per se, while other economic indicators have done much better. Industrial production rose 6.2% year on year in the second quarter, and the economy added 1.1 million jobs. Retail sales are still at levels well above pre-pandemic levels. However, rising inflation and interest rates could slow economic growth. The Fed remains on a steep rate hike path to fight inflation, which will help slow consumer spending. I also expect the US labor market to weaken and the unemployment rate to rise by the end of next year. »

Sal Guatieri

Senior Economist, Bank of Montreal (BMO)

“While this second straight contraction in quarterly GDP fuels the debate about the onset of a recession in the United States, the fact that the economy created 2.7 million jobs in the first six months of the year still seems to argue against the official declaration of a recession. At the moment, we see the US economy rapidly running out of steam in the face of record inflation in four decades and a rapid increase in the cost of borrowing (interest rates). The US economy has become very vulnerable to a recession, which could deter the Fed from ordering a third major interest rate hike in September. For now, until inflation subsides, further rate hikes remain in the cards. And they will not reduce the risks of a real recession. »

Katherine Judge

Economist, CIBC

“Despite this second straight decline in quarterly GDP, the strength of the US labor market prevents this from being defined as a recession; let’s talk more about a disappointment. In fact, as in the first quarter, the measure of gross domestic income could provide an alternative to GDP. This measure is still growing at the end of the second quarter. That said, I expect a return to positive growth in the United States by the end of the year as supply chain issues ease and pent-up demand for goods and services. Moreover, the easing of commodity prices (food, fuel) should bring some relief to household budgets. On the other hand, cautious business investment could slow hiring from its high pace until recently. If true, it would be a welcome development for the Fed in its fight against inflation. »

Derek Holt

Vice President and Director of Economics, Scotiabank Capital Markets

“Even though the media speaks of a recession, few economists use the technical definition of a recession based on two consecutive declines in quarterly GDP. This is partly because GDP can be subject to various distortions. From my perspective, the US economy is not in recession given recent job gains and continued growth in industrial production. The U.S. economy’s GDP could even rebound by the end of the year if further progress is made in addressing supply chain challenges, and strong durable goods orders continue alongside a rebound continued demand for services. »

Falling US GDP: what you need to know

The Commerce Department’s second-quarter gross domestic product (GDP) report highlighted some areas of weakness in the economy and elicited several reactions. Overview.

context

The report comes at a critical time. Consumers and businesses struggled under the weight of suppressed inflation and rising borrowing costs. On Wednesday, the Federal Reserve (Fed) raised its key rate by three-quarters of a point for the second time in a row, in a bid to beat the worst inflation surge in 40 years. This surge in inflation and fears of a recession have eroded consumer confidence and fueled public anxiety about the economy.

The Fed hopes to achieve a notoriously difficult “soft landing”: an economic slowdown that manages to rein in soaring prices without triggering a recession.

The global economy as a whole is also struggling with high inflation and weakening growth, especially after Russia’s invasion of Ukraine, which sent energy and fuel prices skyrocketing. foodstuffs.

Highlights

The Commerce Department said the decline in GDP in the second quarter reflected declines in business investment and home purchases by households. Rising interest rates, the result of a series of Fed hikes, have undermined home construction, which has fallen at an annual rate of 14%. Governments, both federal and local, also curbed their spending.

Consumption, the locomotive of American growth, held up, but thanks to spending on services, and in particular rents, the prices of which soared with inflation.

Purchases of goods have declined. Inventories fell as businesses slowed restocking their shelves, knocking GDP down two percentage points. The decline in GDP over the quarter is 0.2% if we simply compare to the previous quarter, as do other advanced economies.

Reaction in Washington

“It doesn’t look like a recession, in my opinion,” responded President Joe Biden, highlighting a “record” job market and business investment. Its Treasury Secretary, Janet Yellen, also insisted that the economy remained “resilient” even if it “slowed down”, highlighting the more than one million jobs created over the last three months.

For her, the state of the country’s economic activity reflects “an economy in transition towards more stable and sustainable growth”. The opposition, however, does not hear it that way. “Scoop for Joe Biden: we cannot change reality by arguing over definitions”, launched the Republican opposition. And the conservative chain Fox News did not hesitate to declare the United States in recession as soon as the figures were published.

The end word belongs to…

Only one organization in the United States has the authority to officially designate periods of recession, the National Bureau of Economic Research (NBER), but this comes several months late. This independent institute was created in 1920 to refine the study of the American economy. It is its business cycle dating committee that, by observing the economy according to several measures, determines when it is expanding and when it is in recession. “A recession is the period between a peak of economic activity and its nadir, its lowest point”, writes on its website the NBER, which points out that “a recession involves a significant decline in economic activity, widespread in through the economy and lasting longer than a few months”. But because it prefers to rely on consolidated data and release its reviews months after they are published, the NBER may seem like it’s coming after the battle.

According to Agence France-Presse and Associated Press