[Summary] US Economy Contracts for 2 Consecutive Quarters, 'Recession' Debate Intensifies... Yellen Says "Not a Recession"

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. economy has ultimately recorded negative growth for two consecutive quarters as feared, sparking intense debate over whether it has entered a 'recession.' Despite the administration and some economists arguing that it is difficult to define the situation as a recession given the strong labor market and other factors, the conventional technical recession criterion of ‘two consecutive quarters of negative growth’ has rapidly become a reality.

In particular, with the Federal Reserve's ongoing tightening to curb inflation and recent consumption indicators showing signs of slowdown, market concerns are expected to grow even further. The Biden administration, facing the midterm elections in November, is also expected to deepen its worries.

◆ U.S. Records Two Consecutive Quarters of Negative Growth... Meeting 'Technical Recession' Criteria

The U.S. Department of Commerce's Bureau of Economic Analysis (BEA) announced on the 28th (local time) that the preliminary GDP growth rate for the second quarter was -0.9% annualized. This follows the first quarter's -1.6%, marking two consecutive quarters of negative growth. Typically, two consecutive quarters of negative growth are considered a technical recession. By this standard, the U.S. economy is experiencing a recession for the first time in two years since the COVID-19 pandemic fully took hold in the first and second quarters of 2020. The BEA explained that this negative growth stemmed from a broad range of factors including declines in business investment, residential fixed investment, federal and state and local government spending, and nonresidential fixed investment.

However, although the technical recession criterion has been met, the U.S. economy has not officially entered a recession. In the U.S., the National Bureau of Economic Research (NBER) reviews comprehensive economic conditions to make a subsequent determination on whether a recession has occurred. According to the NBER, a recession is defined as 'a significant decline in economic activity spread across the economy lasting more than a few months.'

The NBER, composed of eight economists, evaluates eight major economic indicators including GDP, labor market data, consumer spending, and industrial production. Jeffrey Frankel, a professor at Harvard University's Kennedy School who served on the NBER Business Cycle Dating Committee from 1992 to 2019, explained in a previous interview with Asia Economy that "a recession is not simply judged by two consecutive quarters of GDP decline." A representative example is the 2001 recession, when growth rates fluctuated between positive and negative quarters but a recession was still declared.

◆ "Strong Labor Market" ? Administration Draws Line Against Recession

The Biden administration, which has long emphasized the strong labor market to argue that the current situation cannot be considered a recession, dismissed recession concerns again on this day. Treasury Secretary Janet Yellen stated at a press conference, "We are witnessing a clear slowdown in economic growth," but "a recession refers to a broad and widespread weakening of the economy, which is not currently happening."

This follows remarks by key officials days before the GDP announcement, such as Jared Bernstein, a member of the White House Council of Economic Advisers, saying "the idea that two consecutive quarters of negative growth define a recession is wrong," and Secretary Yellen stating, "I would be surprised if the NBER declared this period a recession." Earlier, the White House posted an article titled ‘How Do Economists Determine a Recession?’ on its website on the 21st, explaining that ‘two consecutive quarters of negative growth’ is neither an official definition nor an evaluation method.

Economists who argue that this cannot be considered a real recession emphasize that past recessions were characterized by high unemployment rates and sharp declines in industrial production. However, the main defense is that the current labor market remains strong.

On this day, Secretary Yellen assessed that not only the labor market but also household income and industrial growth indicators are not bad. Employment increased by 1.1 million in the second quarter, contrasting with the first three months of the previous recession when 240,000 jobs were lost. The U.S. unemployment rate has remained at 3.6% for four consecutive months, close to a 50-year low. Wages are also rising. The weekly initial jobless claims in the U.S., released on this day (256,000 claims), also turned downward after four weeks.

Federal Reserve Chair Jerome Powell, who decided on a giant step (0.75 percentage point rate hike) the day before, also said, "I do not currently believe the U.S. is in a recession," and "the labor market is very strong, so it does not make sense to say we are entering a recession."

Although consumer spending, which accounts for two-thirds of the U.S. economy, is slowing, it still recorded positive growth (1.0%) in the second quarter, which is one of the reasons why it is difficult to define the economy as having entered a recession. There are also indications that the decline in corporate inventory investment and the worsening trade balance, which were the biggest drags on GDP in the first half, are temporary factors.

The New York Times (NYT) reported after the GDP announcement that "most economists still judge that the official recession definition has not been met." Aneta Markowska, chief financial economist at Jefferies, said, "We are in a ‘psychological recession.’ I do not think we are in an actual recession," and predicted, "Growth will accelerate once the inflation shock-induced slowdown weakens."

◆ Pessimism of 'Recession Imminent' Also Continues

On the other hand, pessimism that a recession is imminent is also growing. The downside risks that had been feared are materializing faster than expected. The strong labor market claimed by the Biden administration is also likely to deteriorate soon.

In particular, the large rate hikes undertaken by the central bank to lower inflation will inevitably raise unemployment and suppress consumption, dampening the overall economy. According to a recent CNBC survey, 63% of respondents answered ‘yes’ to the question, ‘Do you think the Fed’s efforts to lower inflation will cause a recession?’ Rapid cooling is already being observed in interest rate-sensitive sectors such as construction and real estate.

Since entering the rate hike cycle in March, the Fed has raised the benchmark interest rate by a total of 2.25 percentage points over four months. Especially in June and July, it took aggressive steps by consecutively implementing giant steps of 0.75 percentage points each. Moreover, Chair Powell has left open the possibility of another giant step in September depending on inflation and other data.

Jim Bird, Chief Investment Officer at Plant Moran Financial Advisors, pointed out, "The path for the Fed to raise rates without pushing the economy into a recession has become narrower," adding, "It is increasingly likely that the door has already closed." Aditi Barve, senior economist at Bank of America (BoA), said, "I still think we have not entered a recession," but also noted, "However, attention should be paid to the underlying trend of weakening domestic demand."

The International Monetary Fund (IMF) recently lowered its U.S. growth forecast for this year by 1.4 percentage points to 2.3% and warned of recession risks. In an early-month Politico poll, 65% of voters already responded that the economy is in a recession. In the New York bond market, the inversion of short- and long-term Treasury yields, considered a precursor to recession, continues.

Economic media CNBC reported, "Most economists do not expect an official recession declaration from the NBER despite consecutive negative growth," but "Wall Street is rather expecting a recession later this year or in 2023."

This content was produced with the assistance of AI translation services.