Is the U.S. Economy in a Recession?
INSIGHTi
Is the U.S. Economy in a Recession?
August 3, 2022
On July 28, 2022, the Bureau of Economic Analysis (BEA) published its advanced estimate for second
quarter gross domestic product (GDP), which showed that real GDP fell by 0.9% after a 1.6% drop in the
first quarter. This has many commentators concerned that the U.S. economy has reentered a recession.
However, the National Bureau of Economic Research (NBER), an independent nonprofit organization,
declares official recessions. If the economy is currently in a recession, it would likely be some time before
the NBER made it official, because it first wants to make sure that the downturn is significant and long
lasting.
In the meantime, economists and policymakers disagree about whether NBER will ultimately determine
that the economy is currently in a recession. A commonly used unofficial rule of thumb for predicting
recessions is two consecutive quarters of negative real GDP growth—a criteria now met. But the GDP
data have not followed the pattern one would typically expect in a recession, and other indicators, such as
employment, are still growing strongly. For background, see CRS In Focus IF10411, Introduction to U.S.
Economy: The Business Cycle and Growth.
What Is a Recession?
Recessions are not determined by the federal government and are not defined in statute. NBER defines
recession as a “significant decline in economic activity that is spread across the economy and that lasts
more than a few months” and does not have a set numerical formula to define a recession. Instead, NBER
evaluates three criteria—depth, diffusion, and duration—using a variety of monthly economic indicators
including, but not limited to, income, employment, consumption, sales, and industrial production.
(Notably, inflation is not a determinant of recessions.)
An outsized impact to one criteria can make up for a weaker impact to another. For example, NBER
declared the United States to be in a recession from March to April 2020—less than two quarters—owing
to the extreme drop in economic activity, despite the brevity of the contraction. Although NBER considers
GDP growth in its quarterly business cycle dating, NBER cites several reasons for not using the two-
quarter rule as a definition for recessions, including not relying on just one indicator, considering depth of
declines in activity, using more frequent monthly data (so as to provide monthly dates for recessions), and
accounting for discrepancies in output and income data—including in the first quarter, when output fell
and income rose. In the meantime, one can observe how GDP and employment have performed so far.
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GDP in 2022
Parsing exactly what has happened with real GDP over the past two quarters is important in determining
the likelihood that the economy is in a recession. It should be noted that the BEA’s advanced estimate is
based on incomplete data and will be subsequently revised, which may change the picture of the economy
in 2022. In fact, the absolute average revision to past advanced estimates is larger than the second-quarter
decline. Keeping that in mind, Figure 1 shows the contributions to the percent change in real GDP. The
growth rate during the initial recovery from the COVID-19 pandemic was relatively high but has
sputtered in 2022. A significant portion of the decrease in real GDP in the first half of 2022 was a result of
a drawdown of business inventories after an unusually large buildup in the second half of 2021. If the
drawdown was a one-off, it would not necessarily be indicative of recessionary conditions.
Figure 1. Contributions to GDP Growth
Source: BEA.
A fall in net exports and government spending also contributed to the negative first quarter growth. The
contribution of government spending was negative again in the second quarter, which is unlikely to be
caused by cyclical factors. Personal consumption expenditure growth—one of the main metrics NBER
considers—was positive in the first and second quarters, although it did slow in the second quarter.
Personal consumption expenditures typically account for about two-thirds of GDP, and thus, a further
slowdown could be problematic for future growth. Perhaps most meaningful is the 13.5% decrease in
gross private domestic investment in the second quarter. It was led by a 14% drop in residential fixed
investment, which could be another sign of a cooling housing market and which some economists
consider to be another recession predictor.
Does the Labor Market Suggest Recession?
Despite negative GDP growth in 2022, most indicators suggest that the labor market is still strong. From
March to June 2022, the unemployment rate has been 3.6%, relatively low by historical standards. The
economy has added at least 350,000 jobs in each of the past 14 months. (However, the Current Population
Survey shows employment declines in two of the past three months.) Average hourly earnings increased
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by 5.1% in the 12 months ending in June. It would be unprecedented to have a recession during such a
strong labor market.
Another unofficial, rule-of-thumb recession predictor is called the “Sahm Rule.” It finds that all
recessions since 1945 have featured at least a 0.5 percentage point increase in the unemployment rate
relative to its previous annual low point—something that has not occurred to this point. The two-quarters
rule and the Sahm rule are not official indicators of recession, but the fact that they currently conflict
shows that evidence of a recession is mixed at best.
Conclusion
According to NBER, the two indicators it most closely considers for dating recessions are real personal
income less transfers and nonfarm payroll employment. The economy had strong job growth in the first
half of 2022. Real personal income less transfers grew in April and May as well but fell in June,
potentially pointing to a slowdown if this trend continues. Whether or not the economy eventually proves
to be in an official recession, the picture provided by the data available at this point is mixed—output
growth seems to be slowing while labor market growth remains robust. Nevertheless, efforts to reduce
inflation may cause a further slowdown in the coming months.
Author Information
Lida R. Weinstock
Marc Labonte
Analyst Macroeconomic Policy
Specialist in Macroeconomic Policy
Disclaimer
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