In Washington circles, saying the “R” word carries a degree of risk.
As the specter of a recession looms over the U.S. economy, the precise definition of what a recession is and when it begins has sparked intense debate — both politically and economically based.
Last week, the White House appeared to be trying to give a boost to a possible declaration of a recession in the world’s largest economy — second-quarter GDP data is due Thursday — with a well-aimed blog post.
The title? “How do economists determine if the economy is in recession?”
In the post, President Joe Biden’s team dismisses the widely accepted definition of a recession as two consecutive quarters of negative growth — a situation the United States could find itself in starting Thursday.
“While some claim that two consecutive quarters of falling real GDP constitutes a recession, that is not the official definition, nor is it how economists assess the state of the business cycle,” the White House said.
Of course, the opposition Republicans quickly picked up the scoop.
“Newsflash for Joe Biden: You can’t change reality by arguing about definitions,” the Republican National Committee said in a statement Monday.
– ‘An official referee’ –
So, beyond the political lathe, what really is a recession?
“There was negative growth in the first quarter of this year. We’ll see what the numbers look like… If (the second quarter) were negative, technically that might be a recession,” said IMF chief economist Pierre-Olivier Gourinchas.
However, in a note on its website, the International Monetary Fund insists that there is “no official definition of a recession”.
“Most commentators and analysts use the practical definition of a recession as two consecutive quarters of decline in a country’s real (inflation-adjusted) gross domestic product (GDP),” says the Washington-based global lender.
For Gourinchas, “the general assessment of whether the economy as a whole is in recession is a little more complex.”
Federal Reserve Chair Jerome Powell said Wednesday that the Fed “is not passing judgment on that,” but added, “What a recession really is — it’s a broad-based decline in many industries that lasts longer than a few.” lasts for months. “
“The job market is sending such a strong signal of economic strength right now that you’re really questioning the GDP data,” Powell said.
David Wilcox, senior economist at the Peterson Institute for International Economics and Bloomberg Economics, says it’s just “wrong” to think an economy is entering a recession after two straight quarters of negative GDP growth.
He says it’s a “practical rule of thumb,” but not gospel.
“I kind of cringe and fight back every time I see that definition,” Wilcox told AFP.
“There is an official recession data arbiter in the United States. And that is the National Bureau of Economic Research.”
– Late to the party? –
NBER, a private, independent and impartial institution, was established in 1920 to refine research on the US economy. Its “Business Cycle Dating Committee” uses multiple data points to determine when the economy is in expansion or recession.
“A recession is the period between a peak in economic activity and its subsequent nadir or trough,” says the NBER on its website.
“The NBER definition emphasizes that a recession involves a significant decline in economic activity that is widespread across the economy and lasts longer than a few months.”
However, as the Bureau prefers to base its assessment on solid data and publish its opinion several months after the figures are released, it may seem a little late to the party.
Ellen Hughes-Cromwick, economist at Third Way, a centre-left think tank, says the NBER’s traditional delay is “not a problem” but rather a “methodology” that allows the bureau to avoid repeated revisions.
“It’s common knowledge among economists that they have less than 50 percent of the actual statistics measuring second-quarter GDP in this preliminary estimate,” she explains.
“In other words, 50 percent of this preliminary GDP estimate… are estimates,” adds Hughes-Cromwick, who worked as an economist under Presidents Ronald Reagan and Barack Obama.
Translation: The NBER is perhaps entirely justified in taking its time.
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