A different view of the US economy: Maybe it’s not really shrinking

When the Commerce Department reported last month that US economic output Contracted for two consecutive quarters During the first half of the year, this raised concerns that the US might be in a recession, which in a popular general rule has been defined as two negative quarters of growth. The new data sends a different message: Instead of stagnating, the economy may be in a state of near recession.

Economic output can be measured in two different ways: gross domestic product, or gross domestic income. For every dollar an individual spends to purchase some good or service—a restaurant meal, a car, or a doctor’s visit—another individual earns one dollar of income for making and providing that good or service. GDP captures the spending side of these transactions, GDI the income side.

In theory, GDI and GDP should be equal, although there is always some statistical discrepancy because they are measured using different data sets and different sources. This year the contrast was unusually great. During the first half of the year, GDP contracted at an annual rate of 1.1% adjusted to account for inflation. Meanwhile, the GDI, made up of a measure of corporate earnings, wages, benefits, self-employment income, interest and rent, expanded at a 1.6% annual rate, the Commerce Department said Thursday.

It is difficult to know the reason for this discrepancy. At a time of great economic fluctuations, statistics that measure the economy can be less reliable. Some economists are looking for a clearer picture by averaging GDP and GDI. This measure of production hardly moved at all, rising at an annualized rate of 0.2%, adjusted for inflation, during the first six months of the year. This is more in line with a faltering economy than in a recession.

“The economy is in a recession, but it’s not in recession,” said Robert Gordon, a professor at Northwestern University and a long-time member of a committee at the National Bureau of Economic Research, which determines the beginning and end of recessions.

Federal Reserve Chairman Jerome Powell said the central bank should keep raising interest rates until it makes sure inflation is under control. He spoke at the Federal Reserve’s annual symposium in Kansas City, Wyoming. Photo: Jim Urquhart/Reuters

The bureau does not follow the general rule that two negative quarters of GDP growth means stagnation. A recession is defined as a broad, continuous and significant contraction in overall activity, which can be seen across a range of statistics. It looks at measures including employment, business sales, industrial production and income. Among her favorite metrics are average GDI and GDP. “You can’t call this a recession at all,” Mr. Gordon said, looking at those numbers.

Some studies have shown that GDI may be a more reliable measure of real-time activity than GDP. In a 2010 study, Jeremy Nallywick, then an economist at the Federal Reserve, found that GDP tends to regress toward measures of income over time. If this year follows this pattern, the GDP contraction may be adjusted far into the coming years.

Chris Farvares, co-head of US economics at S&P Global, provides a long list of reasons why the economy may stall. The record fiscal stimulus enacted in 2020 and 2021 is shrinking at a rapid rate; High inflation reduced the real purchasing power of households; The Fed raised short-term interest rates to counter inflation, putting pressure on the housing market; Supply chain disruptions have made it difficult for companies to obtain products.

Add all that, and the economy that emerged from the earlier stages of Covid with a great deal of momentum in the second half of 2020 and 2021 lost it in 2022. “To the pandemic, political responses and now Russia’s invasion of Ukraine,” Mr. Varvares said. “Don’t get hung up on labels. Whether it’s a shallow growth or shallow contraction, it will still feel bad.”

What happens next will largely depend on the behavior of inflation over the next few months.

According to the Fed’s preferred metric, Annual inflation rate decreased to 6.3% in July from 6.8% in June, thanks in part to lower energy prices, data released on Friday showed. Many financial market participants had hoped that the slowdown in inflation would continue and that the Fed would be in a position to slow down its campaign. interest rate increase. In this scenario, consumer spending, business investment, and housing will rebound, and the economy will emerge from the doldrums and into a renewed expansion.

A job fair in Sunrise, Florida, this summer, when the US job market remained strong.


Joe Riddell / Getty Images

But a recovery in energy prices due to the war in Ukraine or other factors could prevent any sustainable improvement in inflation. On Friday, Federal Reserve Chairman Jerome Powell warned that “a one-month improvement falls well short” of what is needed to conclude inflation is back to the Fed’s 2% target. His warning took the air out of the market’s hopes. If inflation does not abate and the Fed responds with additional, bold interest rate hikes, the US may be on the cusp of an unmistakable recession that everyone would agree to call a recession.

Write to Jon Hilsenrath at [email protected]

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