Recession – what does it mean?

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Recession - what does it mean?

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Mark Abramson for the New York Times

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There is a good chance the Bureau of Economic Analysis, which produces gross domestic product and other macroeconomic data, will preliminary state Thursday that real GDP contract in the second quarter of 2022.

Since you already announced that real GDP contracted in the first quarter, there will be a lot of talk about this We are officially in a recession.

But we won’t be.

Wall Street shares fell early on July 26, 2022, after a profit warning from Walmart exacerbated recession concerns.  Photo by NICHOLAS KAMM / AFP.

Wall Street shares fell early on July 26, 2022, after a profit warning from Walmart exacerbated recession concerns. Photo by NICHOLAS KAMM / AFP.

This is not how recessions are defined; more importantly, it’s not how they should be defined.

It is possible that people who actually decide whether we are in a recession (more on that in a minute) will finally declare that a recession started in the United States in the first half of this yearalthough other economic data is unlikely.

But they won’t base their decision solely on the fact that we have had two consecutive quarters of falling real GDP.

To understand why, it helps to know a little about the history of what is known as dating of the business cycle.

A modern economy is an ever-changing thing, with individual industries ever increasing and decreasing.

Remember the video rental shops?

However, in the 19th century, it became clear that there were times when almost all industries they were in decline at the same time (recessions) and other periods during which most industries were expanding.

To understand these fluctuations, economists wanted to compare different recessions and look for common characteristics.

But to do that, they needed a history of the recessionone based on a variety of measures, since GDP didn’t even exist as a concept yet, let alone a number regularly estimated by the government.

A seminal 1913 book by the American economist Wesley Clair Mitchell is widely credited with pioneering empirical study systematic of economic cycles.

In 1920, Mitchell helped found the National Economic Research Officean independent organization that soon found itself devoting much of its research to economic fluctuations and began offering a chronology of business cycles in 1929.

Since 1978 the office has had a permanent group of experts called the Business Cycle Dating Committee, which decides, with delay, when it started and when it ended a recession based on multiple criteria, including the employment, industrial production, etc.

And the US government accepts these failures.

So the official definition of a recession is that it is a time when the committee has declared a recession; it’s a judgment call of experts, not a formula.

So where does the two-quarter thing come from?

Part of the answer is that the office doesn’t make real-time recession calls.

For example, although the Great Recession is now considered to have started in December 2007, the dating committee didn’t call it that until December 2008.

Furthermore, other nations have no equivalent of the office.

So there has always been an incentive to look for simple, non-judgmental formulas that can quickly lead to a recession.

Two quarters of economic contraction, a long enough recession sustained while it is probably not a statistical problem, it seems, on the surface, a reasonable criterion.

But it’s not hard to see how deeply misleading it can be, even if the data is correct.

Imagine, for example, an economy that experienced a steep decline for one quarter, then stabilized briefly and grew slightly, then resumed its decline for another quarter.

Would you really like to deny that this economy has suffered a recession?

There are better indicators.

The Sahm’s rule, developed by Claudia Sahm, a former Fed economist now at the Jain Family Institute, attempts to identify the beginning of recessions by looking significant increases in the unemployment rate.

Indeed, if we did not have the office to make the decision, there would be a good reason to see the Sahm rule not as a predictor but as a definition:

a recession started when the Sahm rule says yes.

And right now, he emphatically adjusts it does not say that we are in a recession.

This is partly due to the fact that GDP numbers seem out of sync with many other economic indicators, part of a larger picture where economic data seems to tell inconsistent stories.

Perhaps because, to use a technical term, we are still a little baffled by the pandemic.

Employment growth, for example, has been strong. Is it consistent with a recession?

Even gross domestic income, a number that should literally equal GDP in principle but is estimated using different data, doesn’t tell the same story, because it didn’t decrease in the first quarter.

Therefore, it would be foolish to declare that we are in a recession even if Thursday’s number is negative and the first quarter number is not revised upwards.

And what difference would a recession call make, anyway?

What should matter is the state of the economy, which is complicated, not the particular word you use to describe it.

Unfortunately, with the US political scene being what it is, we are likely to see a storm of demands for the National Bureau of Economic Research committee to immediately declare a recession and for the Biden administration to admit it is underway.

I already hear rumors that the administration will apply to double standard if you refuse to accept the “official” rule that two quarters of negative growth defines a recession.

Well, there is no such rule.

It is entirely possible that, in fact, we will soon experience a recession; it is also possible, although less likely, that it has already begun.

But there is no reason to use it the R word this week.

Source: Clarin

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