July 26, 2022—It’s hard to avoid the “R” word these days. The question of whether the economy is headed toward a recession has been front and center, almost superseding concerns about inflation. During our May webinar “Growth Scare or Recession?”, we explained our reasoning for the U.S. to avoid the latter, but since that time the risks have risen noticeably. After first quarter data on economic growth showed a contraction, and with potential for a second quarter of contraction when data is released on July 28th, one consideration that has bubbled up is the (seemingly) simple question of how a recession is defined. Typically, there is less debate about definitions because most recessions tend to coincide with a clear slowing in the economic data. However, current economic data are sending very mixed signals on the strength of the economy given the unique nature of the pandemic recession and recovery. Our base case scenario still looks for the economy to slow, but to avoid recession. While a second quarter of contraction would raise alarm bells by triggering a technical recession, details around sectors of the economy driving that contraction will be important for determining whether the recession will be broad-based, persistent, and deep, and therefore a greater concern for the outlook.
Recessions defined: NBER vs. technical recession
Economists and markets traditionally refer to recessions as determined by the Business Dating Cycle Committee of the National Bureau of Economic Research (NBER), a group of eight private, nonpartisan economists. An “NBER recession” is defined as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” So “depth, diffusion, and duration” of the economic decline are all important criteria.
A wide variety of indicators of economic activity based on data from national statistical agencies is used in the NBER’s assessment, including measures of inflation-adjusted consumer spending and income, employment, and industrial production, among others. However, there are no hard and fast rules about how the committee weighs these different indicators in making their determination. Instead, the process is more subjective—as Supreme Court Justice Potter Stewart noted in a 1964 ruling, “I know it when I see it.” In addition, it typically takes some time for official recession designations to be declared. The start of the Great Recession was announced in December 2008, one full year after it was determined to have started.
Another frequently cited definition, “technical recession,” sets a simpler bar, merely requiring economic activity as measured by gross domestic product (GDP) to contract for two consecutive quarters. By this metric, the likelihood of recession has risen substantially. We’ve already seen growth of -1.6% on a quarter-over-quarter (q/q) annualized basis in the first quarter of this year. And estimates of second-quarter GDP have slowly been deteriorating, with the Federal Reserve Bank of Atlanta’s (Atlanta Fed) GDPNow, a closely watched growth forecasting model, currently projecting GDP growth of -1.6% q/q annualized as of July 19th (Figure 1) which, if it materializes, would constitute a technical recession. However, the median of Bloomberg consensus forecasts still looks for positive growth of +0.7%q/q annualized.
Figure 1: Atlanta Fed GDPNow forecast for 2Q 2022 raises the possibility of technical recession