the economy is not in recession


The US Bureau of Economic Analysis last week released its second forecast for GDP growth for the June quarter. Growth is expected to be down 0.6%, which is an improvement from the initial forecast of 0.9%, which was down 1.6% in the first quarter.

Note that the published growth rate basically takes the change in GDP from one quarter to the next and multiplies it by four to get the annual result. This means that the 0.6% decline (actually 0.58% but rounded up) is his 0.15% decline in GDP from the March-June quarter.

The media and many people are using two consecutive quarters of falling GDP as a sign of recession, but this is an overly simplistic definition. The organization being considered for determining recessions, which has been involved in analyzing economic peaks and troughs since at least 1961, is the National Bureau of Economic Research (NBER), founded in 1920. Recession of the month from February to April 2020 due to the Covid pandemic.

Looking at many of the different factors the NBER uses to determine when a recession will begin, it’s clear that the US economy is not in recession.

What is a recession?

The NBER’s traditional definition of a recession is “a significant decline in economic activity that spreads across the economy and lasts for more than a few months.” 3 Criteria – Depth, Diffusion, DurationExtreme conditions revealed by one criterion may partially offset weak indications by another criterion. (Bold is mine because it’s important in defining a recession).

Why isn’t the definition two quarters?

NBER may, in its Frequently Asked Questions or Frequently Asked Questions section, state:First, rather than identifying economic activity solely by real GDP, we consider a range of indicators. Second, we consider the depth of the decline in economic activity. The NBER definition includes the phrase “significant decline in economic activity.” Real GDP could therefore fall relatively modestly for two consecutive quarters without warranting a judgment that a peak has occurred. ”

It also adds: Fourth, when real GDP data are available, we give equal weight to real GDI when examining production trends on a quarterly basis. The difference between GDP and GDI, called the “statistical discrepancy,” was particularly significant during the 2001 and 2007-2009 recessions. ”

GDP fell slightly over the last two quarters

GDP fell 1.6% in the March quarter, and a second estimate for GDP in the June quarter was a 0.6% decline. Please note that these estimates are based on quarterly estimates. The actual declines were 0.4% and 0.15% respectively. They don’t seem to fit the NBER depth criteria.

Trade and inventories as a share of GDP show decline

GDP showed a 1.6% decline in the March quarter. When digging into details:

  • The net export component showed a significant negative impact of 3.2%, while inventories added a negative impact of 0.35%
  • Taking these into account, GDP would show 2% growth
  • Also bear in mind that private consumption, the main driver of the economy, increased by 1.2%.

The June quarter saw the following:

  • Net exports added 1.4% to growth
  • Inventories had a negative impact of 1.8%.
  • Subtracting these two from the 0.6% decline means that GDP fell by only 0.17%.
  • And this slight decline was offset by a negative impact of 0.32% from government spending.
  • And consumer spending still held up, growing 0.99% in the quarter.

This year’s personal income is increasing month by month.

One of the factors NBER uses in its analysis is real personal income. This year it has increased every month, with a 0.2% increase in July (not shown in chart below).



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