Personal Incomes Are Falling, But Other Economic Indicators Are Flat or Rising

That's how it's possible we're not in a recession even as people hate economic conditions

Dear readers,

I thought we disposed with the idea that a recession is when the economy shrinks for two consecutive quarters in 2020, when we had a recession that was less than two quarters long. That recession lasted just two months: It started in February and ended in April. That meant the economy contracted only in one calendar quarter (the first quarter of 2020), but it was nonetheless a recession and a very steep one.

I wrote as much in June 2020: that the recession that had then just been announced by the business cycle dating committee of the National Bureau of Economic Research was likely already over after just two months, a fact it confirmed with an official announcement a year later.

Of course, in addition to being the shortest US recession ever, the 2020 recession was probably the easiest to spot as it was happening in real time. We shut down whole swathes of the economy; employment and output suddenly cratered. Any idiot could look at the charts and see when the recession started and when it ended (as soon as stuff started opening up again). Normally, the question of when a recession has started is somewhat harder to answer. For example, back in late 2008, it wasn’t obvious that the recession we were experiencing had begun in 2007, nor was it contemporaneously clear that the recession that felt as though it was caused by the 9/11 attacks had actually begun months earlier, in March 2001.

So, are we in a recession now? That’s not clear, and it won’t be clear even if tomorrow’s GDP print is negative. Of course, the print might not be negative: If you put a gun to my head, I’ll tell you my guess is that it will be, but the Wall Street estimates are all over the map, with many analysts expecting a report of positive growth.

Gurgavin @gurgavin

GDP ESTIMATES FOR TOMORROW VISA -2.1% BANK OF AMERICA -1.5% TD SECURTITIES -1.0% DEUTSCHE BANK -0.6% BARCLAYS -0.4% CREDIT SUISSE -0.4% MOODY'S -0.4% NOMURA -0.3% UBS -0.2% HSBC 0% WELLS FARGO 0.2% CITI 0.5% CIBC 0.7% JEFFERIES 0.9% GOLDMAN 1% MORGAN STANLEY 1% JPMORGAN 1.4%

But even if tomorrow’s print is negative, that doesn’t necessarily mean we’re in a recession, because a recession is not simply when GDP shrinks for two consecutive quarters (and also because, as I discuss below, the economy may not actually have shrunk in the first quarter).

Here’s how the NBER says it calls recessions (emphasis added):

The NBER's definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. In our interpretation of this definition, we treat the three criteria—depth, diffusion, and duration—as somewhat interchangeable. That is, while each criterion needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another. For example, in the case of the February 2020 peak in economic activity, the committee concluded that the subsequent drop in activity had been so great and so widely diffused throughout the economy that, even if it proved to be quite brief, the downturn should be classified as a recession.

Because a recession must influence the economy broadly and not be confined to one sector, the committee emphasizes economy-wide measures of economic activity. The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies. These include real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production. There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions. In recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment.

To be fair, one reason people use the “two quarters of consecutive negative economic growth” rule of thumb is that some jurisdictions other than the US do use that as an official definition.

Another reason is that the rule of thumb usually works pretty well: Ordinarily, when the economy shrinks for two consecutive quarters, we are in fact experiencing “a significant decline in economic activity that is spread across the economy and lasts more than a few months” as defined with more complexity by NBER. That’s because the measures the NBER looks at tend to move approximately in line with real GDP growth; when it’s negative, so are they.

Michael R. Strain @MichaelRStrain

Question: Out of the past 10 times the U.S. economy has experienced two consecutive quarters of negative economic growth, how many times was a recession officially declared? Answer: 10.

But NBER has its reasons for using a more convoluted definition that aligns usually, but not always, with the two-consecutive-quarters-of-negative-GDP-growth rule — and those general reasons point to some specific reasons to suspect the current situation may be the exception where they don’t align. Here’s what they say about why they use the more complex rule:

First, we do not identify economic activity solely with real GDP, but consider a range of indicators. Second, we consider the depth of the decline in economic activity. The NBER definition includes the phrase, “a significant decline in economic activity.” Thus real GDP could decline by relatively small amounts in two consecutive quarters without warranting the determination that a peak had occurred. Third, our main focus is on the monthly chronology, which requires consideration of monthly indicators. Fourth, in examining the behavior of production on a quarterly basis, where real GDP data are available, we give equal weight to real GDI. The difference between GDP and GDI—called the “statistical discrepancy”—was particularly important in the recessions of 2001 and 2007–2009.

As noted there, GDP is only reported quarterly, which means you can’t use GDP to identify the month when a recession starts or ends. As for the last point — if your question is “what’s GDI?” or “what’s the statistical discrepancy?” bracket those thoughts, because the answers to those questions give a reason to think the economy may not have been shrinking in the first quarter.