Real GDP

No Recession . . . Yet

The press is abuzz with claims that the United States is in recession because real GDP declined in both the first and second quarters of 2022. Many people use this “two consecutive quarters of declining GDP” formula as an informal indicator of a recession. And, they are generally right, it has been useful: since 1950, nine of 11 recessions designated by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee (BCDC) included at least two consecutive quarters of falling GDP. Moreover, given the recent slowdown in economic activity, people are starting to feel as if they are experiencing a recession. Indeed, going forward, we expect that a recession will be associated with the disinflation which the Federal Reserve seeks (see our recent post).

Nevertheless, in current circumstances, there are good reasons not to rely on the simple recipe that equates two consecutive quarters of falling GDP with a recession. Indeed, when people ask us whether the economy currently is in a recession—something that occurs daily—we respond: “not yet, but very likely over the next year.”

In this post, we provide a primer on the criteria that the NBER BCDC uses to produce the authoritative dating of U.S. recessions. (The complete NBER cyclical chronology is here.) We explain how economists improve upon the simple formula by using multiple sources of information that are observed frequently and are less prone to large revisions—especially around business cycle turning points. We conclude with a brief explanation of why the risk that the United States will enter a recession in the near future is very high….

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COVID-19 Economic Downturn: What do cyclical norms suggest?

Business cycle downturns come in many forms. Some are big, others small. Some are long, others short. Some result from policy errors or euphoric booms, while others are the consequence of external events.

Nevertheless, downturns have some common features and regularities. Among those that have been reasonably stable over much of the past half century are the relationships among unemployment, activity and federal budget deficits. Using these, we explore the impact of the U.S. COVID-19 economic downturn that began last month.

To sum up, recent labor market developments already make clear that we are in the midst of the deepest recession since the 1930s. In fact, the coordinated shutdown of a large swath of the American economy has made this plunge more rapid than that of the Depression. Whether we are at the start of a second Depression depends greatly on how long we keep the economy in a state of suspended animation.

If the lockdown extends from weeks to months, the short-term pain will turn into long-term scarring. The longer it takes to reopen businesses safely, the more damage we will do to the many linkages and networks (including lender-borrower, supplier-user and employer-employee relationships) that make up the fabric of the economy. As the wave of bankruptcies grows, damage to the financial system will increase, as will the resulting harm to the economy’s productive capacity….

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Inflation and Price Measurement: A Primer

People use a variety of statistics to gauge how the economy is doing. It is fairly straightforward to measure nominal GDP, so the challenge of estimating real economic growth arises from the need for accurate measures of prices. Price measurement also is key for inflation-targeting central bankers, who need a number as a guide and for public accountability. To be credible, that number must be based on an index constructed using established scientific methods.

Reflecting a set of well-known (and nearly insurmountable) difficulties, measured inflation has an upward bias. That is, the inflation numbers that statistical agencies report are consistently higher than the theoretical construct we would like to compute. As a consequence of this upward bias in inflation measurement, our estimates of growth in real output and real incomes are systematically too low.

The big question today is whether the bias in inflation measurement, and hence the bias in the measurement of growth, has increased in recent years. As Martin Feldstein describes in detail, the answer to this question is important, as it affects how we collectively view long-run progress. If published statistics show sluggish real growth, as well as slow growth in real wages and incomes, then people may be unduly pessimistic. A worsening bias would add to that pessimism.

In practice, however, careful recent analysis suggests that inflation measurement bias has not changed much since the early 2000s….

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