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Can we support the theory that this is not a recession?

August 31, 2022

I got my masters for Northwestern, and one professor (Robert Gordon) whom I agree with per an article in the Wall Street Journal says, “The economy is stagnating, but it’s not declining." Robert Gordon is a Northwestern University professor and longstanding member of a committee at the National Bureau of Economic Research (which dates the beginning and end of recessions). The bureau doesn’t follow the rule of thumb that two negative quarters of GDP growth mean recession. It defines a recession as a broad, sustained and significant contraction in overall activity, viewable across a range of statistics. It looks at measures such as: employment, business sales, manufacturing production and income. Among its favored measures is the average GDI (Gross Domestic Income) and GDP (Gross Domestic Product). Looking at these numbers, Mr. Gordon said, “You couldn’t call this a recession at all.”

Some studies have shown that GDI might be a more reliable real-time gauge of activity than GDP. In a 2010 study, Jeremy Nalewaik, then a Federal Reserve economist, found that GDP tended to be revised toward income measures over time. If this year follows the pattern, the GDP contraction might be revised away in the years ahead.

Chris Varvares, co-head of U.S. economics at S&P Global, offers a long list of reasons why the economy may have stalled. Record fiscal stimulus enacted in 2020 and 2021 is diminishing at a rapid rate; higher inflation has reduced households’ real purchasing power; the Fed has been raising short-term interest rates to counteract inflation, squeezing the housing market; supply-chain disruptions have made it harder for companies to source products.

The latest economic news, analysis and data curated weekdays by WSJ's Jeffrey Sparshott. Add it all up, and an economy that emerged from the earlier stages of Covid with a great deal of momentum in the second half of 2020 and 2021 has lost it in 2022. “The economy has been torqued by a very unusual set of forces related to the pandemic, policy responses and now Russia’s invasion of Ukraine,” Mr. Varvares said. “Don’t get hung up on labels. Whether it is shallow growth or a shallow contraction, it will still feel bad.”

What happens next will depend a great deal on the behavior of inflation during the next few months and I will keep you tuned in to any changes. According to the Fed’s preferred measure, the annual inflaition rate decreased to 6.3% in July from 6.8% in June, thanks in part to falling energy prices, data released Friday showed. Many financial-markets participants have been hoping that the inflation slowdown will be sustained and the Fed will be in position to slow its campaign of interest-rate increases. In that scenario, consumer spending, business investment and housing would rebound, and the economy would emerge from its stall to renewed expansion.

But a rebound in energy prices because of the war in Ukraine or other factors could forestall any sustained improvement in inflation. On Friday, Fed Chairman Jerome Powell warned that “a single month’s improvement falls far short” of what he needs to conclude inflation is returning to the Fed’s 2% target. His warning took air out of the market’s hopes. If inflation doesn’t recede and the Fed responds with additional, aggressive interest-rate increases, then the U.S. might be on the cusp of an unambiguous downturn that everyone agrees to call recession.

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