Recession talks have dominated the news lately, with an endless supply of pundits debating whether the United States is in a recession. It’s good to have this debate, but virtually everyone seems to have forgotten the incredibly abnormal circumstances that are fueling the argument.
That’s not to say that anyone should ignore the bad policies — there are tons of them — that contribute to economic turmoil, but policymakers will only make things worse if they lose sight of what happened. The obvious starting point is early 2020.
As COVID-19 began to spread across the country, state and local governments issued stay-at-home orders, effectively shutting down the economy. The resulting drop in consumer purchases was unlike anything the nation had seen before.
Between the fourth quarter of 2019 and the second quarter of 2020, nominal gross domestic product (NGDP) fell from $21.7 trillion to $19.5 trillion. This 10.22% drop beats anything in the historical record. (And though everyone seems to forget it, a Waste in the overall price level.)
Then, almost without warning, the economy revived.
Between the second quarter of 2020 and the fourth quarter of 2020, the NGDP increased by 10.27%. Although the NGDP growth rate came very close to this number in 1950, the increase in 2020 is the largest two-quarter increase on historical record. And that was followed by another 8% surge through the third quarter of 2021.
Of course, the massive drop in demand caused all kinds of supply problems, and with so many people unable to work, it spurred a burst of federal spending. By the time all was said and done, Congress had spent nearly $7.5 trillion on stimulus programs, boosting Americans’ disposable income well above the average growth rate.
Unsurprisingly, the massive surge in consumer demand exacerbated the many supply-side problems caused by the pandemic and government-imposed shutdowns, and inflation picked up at a rate not seen in 40 years .
So, whatever you call the current economy, it is not part of a remotely normal business cycle.
And forecasters should ditch any pretense that they know when things will return to normal, since all of these forecasts depend on wildly abnormal data. In other words, predicting economic outcomes – something that has already been a hit or miss, to say the least – is virtually impossible right now because the data is so anomalous.
These problems are bad enough for anyone who insists on determining whether the United States is in a recession, but an even bigger problem is that there is no objective definition of a recession. None at all.
Consequently, any argument about whether the economy is formally in recession amounts to an unfounded opinion.
In fact, it’s a bit tricky to compare official recessions over time because the National Bureau of Economic Research (NBER) doesn’t use an objective, consistent definition. The official explanation is as follows:
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. In our interpretation of this definition, we treat the three criteria—depth, prevalence, and duration—as somewhat interchangeable. That is, while each criterion must be met to some degree individually, extreme conditions revealed by one criterion may partially offset weaker evidence from another.
Because a recession must affect the economy broadly and not be confined to one sector, the Committee emphasizes macroeconomic policies on economic activity. The determination of the high and low months is based on a series of monthly measures of aggregate real economic activity published by the federal statistical offices. This includes real personal income net of transfers, non-farm payrolls employment, household survey employment, real personal consumption expenditure, price-adjusted wholesale and retail sales, and industrial production. there There is no hard and fast rule as to what actions bring information into the process or how it is weighted in our decisions. [Emphasis added.]
A significant Waste? More than one little Months? Three interchangeable criteria? (And they can offset each other?) No hard and fast rule? And a bunch of economists have to agree before giving recession dates?
It’s amazing that there is right now one Set of NBER business cycle data.
Rather than arguing about whether America’s economy is in recession, it’s also worth pointing out that GDP has only declined five consecutive quarters since 1947, so the current situation is certainly bad.
While this isn’t much of a revelation to anyone who’s been paying attention, even now, in the most unlikely of times, there are signs, both good and bad.
For example, GDP has fallen for consecutive quarters, inflation is high, and both total non-farm payrolls and labor force participation remain below pre-pandemic levels. living begins have fallen to a nine-month low.
On the other hand, the decline in GDP in the second quarter was smaller than in the first quarter, consumer spending remained strong, industrial production is growing, and personal income increased in both the first and second quarters. In addition, budget balance sheets are strong. For example, debt service payments as a percentage of disposable personal income are at an all-time low (the Series begins in 1980).
None of these positive signs are meant to “prove” everything is fine or excuse the policy mistakes that have worsened the economy. In fact, there are tons of bad policies that have legitimately caused millions of people to argue about how bad things have gotten.
However, when it comes to the big questions, there may not be an easy political solution.
For example, the United States job market could be in the midst of major changes due to years of bad policies, the fallout of which has simply accelerated the pandemic and government shutdown. That Employment gap remains nearly 2 percent, meaning employment is almost 2 percent below what the pre-pandemic trend suggests it would otherwise be right now. However, a closer look suggests this Most of this gap is explained by workers aged 65 and over choosing to retire and to a lesser but large extent 20-24 year olds who are retiring.
For years, companies have lamented the difficulty of finding workers and warned of the imminent retirement of baby boomers. And demographers have long noticed the trend to have fewer children, but critics consistently scoffed at the idea that there actually was a labor shortage in the United States.
Against this background, Congress has steadfastly refused to enact major reforms of the badly broken immigration system, pretty much the only way to get more workers. Whatever the reason, employers now have to pay workers more, higher costs that tend to push consumer prices up, thus exacerbating inflation. (disturbing, Productivity is at a 75-year lowbut that’s for another column.)
And with supply-side issues contributing to high inflation, the Fed is in a major bind. It needs to fight inflation to fulfill its legal mandate and maintain its credibility, but it knows that monetary policy is ineffective against price increases caused by supply shocks.
That leaves Americans at the mercy of Congress for positive policy responses, and that is a most unfortunate position.
Practically speaking, the only thing Congress is good at is spending other people’s money, which is exactly the wrong recipe for fighting inflation. The recent $7.5 trillion in stimulus/pandemic aid has exacerbated supply-side problems and pushed prices higher. More government spending will only do the same, so for the love of everything that exists in the universe, Congress should throttle its spending role. (Congress should also ignore the critics who are calling for higher taxes to curb inflation, but I’m pretty sure members don’t need much convincing that now is a bad time to raise taxes.)
Americans would be much better off if the federal government resigned now, but Congress doing less is even rarer than back-to-back quarterly declines in GDP.
If Americans are lucky, things will grind to a halt and there won’t be any major spending increases before the next election. If they are very lucky Congress will enact important political reforms that are free Increase private sector employment– including those who make energy products from fossil fuels – to increase the supply of goods and services. It would help eliminate supply shortages and lower prices, giving millions of Americans more economic opportunity.
That would be incredibly unusual circumstances on Capitol Hill, but it’s how Congress can help fix the bad economy.