Is This a Recession? Wrong Question.
It’s the numbers that matter, not the nomenclature.
The U.S. economy shrank for the second consecutive quarter, guaranteeing a robust news cycle of people shouting the word recession back and forth at each other. President Joe Biden has assured the public that the U.S. economy is not actually in a recession, while conservative media will surely use today’s report to state confidently that it is.
So are we in a recession, or not? That’s the wrong question to ask. But before explaining why, let me try to answer it.
One popular definition of a recession is indeed two straight quarters of negative growth. And we might have reached that milestone today. But not necessarily. Quarterly growth estimates are revised multiple times, and they’re commonly revised dramatically. Collecting a bunch of numbers about the economy in real-ish time—the car purchases, the single-family-housing investments, the furniture imports, and the iPhone exports—is grueling and complex work for the Bureau of Economic Analysis. Factoring in the error margins, there is still roughly a 50 percent chance that the economy grew in the first six months of this year.
That “popular definition,” at any rate, is not official. Recessions are a judgment call made by the National Bureau of Economic Research’s Business Cycle Dating Committee, which consists of eight economists. The bureau defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” On its “Frequently Asked Questions” page, the NBER takes on the definitional confusion directly: “Most of the recessions identified by our procedures do consist of two or more consecutive quarters of declining real GDP, but not all of them. In 2001, for example, the recession did not include two consecutive quarters of decline in real GDP.”
The U.S. economy is shaped by the decisions of several hundred million people, and the definition of a recession is determined by exactly eight of them. That’s one good reason to avoid the “are we in a recession?” debate entirely.
Another is that a recession call isn’t particularly important to anybody’s life. Next week you may walk outside and buy a coffee for a few bucks. You’ll engage in this exchange in a country where inflation is clearly very high and the labor market is clearly very strong. What difference does it actually make to you if, hundreds of miles away, eight oracles have muttered the word recession? Phenomenologically, it doesn’t change anything about your life—not the price of the coffee, not the wage of the barista, and not the income in your pocket.
This economy is pretty crummy for a lot of people. Inflation is at a 40-year high. Hundreds of millions of Americans are watching their wages decline in inflation-adjusted terms. Gas prices have fallen, but energy is still expensive. And because the pandemic has sent demand and supply in weird directions, shortages and snafus have popped up all over the place—in microchips, and furniture, and baby formula, and air travel.
“Is this a recession?” feels like the question of the day. But I’m telling you it’s the wrong question. It represents an anxiety over terminology rather than over reality. The reality of this economy is that high inflation is making people feel poorer, and rising interest rates are discouraging some investment, and it’s all happening in the context of incredibly low unemployment. Somewhere down the line, eight people you’ll probably never meet will determine whether that meets their definition of a recession. But in the meantime, it’s the numbers that matter, not the nomenclature.