The US economic situation at the end of Q2 2022
On July 28, the US Bureau of Economic Analysis (BEA) released GDP data for Q2 2022. Real GDP declined by -0.9% compared to Q1, for which the GDP decline was also negative at -1.6%. Thus, the possibility of declaring a new “mild recession” in the US has arisen, as 2 consecutive quarters of GDP growth have been negative. At the same time, the “2Q” rule is not an official one but a simplified one that has worked 99% before. At least the National Bureau of Economic Research (NBER), which officially announces when recessions start and end in the USA, has repeatedly stressed that it does not use this rule but considers more economic parameters (employment growth). In the standard situation (throughout the history of observations) the beginning of a recession has always been accompanied by an increase in unemployment (Fig. 1).
Fig. 1 Unemployment rate. NBER-dated recessions in gray.
Source: Bureau of Labor Statistics via the Federal Reserve Bank of St. Louis. (https://www.nber.org/research/business-cycle-dating )
However, the current US economic situation is very different from the standard one. If the NBER announces the start of a new recession beginning in January 2022, there would be a situation where the recession was accompanied by a decline in the unemployment rate from 4 to 3.6% during the first 2 quarters of the year. In other words, the U.S. would experience a recession at virtually “full employment.”
In addition, GDP growth alone is not definitive proof of the beginning of a “mild recession,” at least for two reasons. First, the primary GDP figure will be subject to several revisions over the next 2 years, which could change the sign of GDP growth from “-” to “+” (as was the case with the 2001 recession date). Second, a planned change in the base year when calculating real GDP can also change the sign of GDP growth from “-” to “+” For example, in 1996 prices, when the 2001 recession was dated, there were 2 quarters of real GDP growth (2nd and 3rd). Then, almost 2 years later, when the last revision of the GDP data was completed, it turned out that the recession began almost 6 months earlier than it was officially announced. This fact even sparked conversations among NBER members about possibly revising the original 2001 recession start date (which had never been done before). Later, however, when the base year was changed from 1996 to 2002, it turned out that such a revision was not necessary. But another problem arose – the “2-quarter rule” was no longer followed, i.e., GDP growth became negative in Q1, positive in Q2, negative again in Q3 2001, and positive in subsequent quarters of several years. In other words, dating the 2001 recession to 2002 prices would violate the “2 quarters” rule.
Thus, in the case of a “mild recession,” it is extremely difficult to date the start (end) of the recession, as evidenced by the significant one-hour lag between the actual start of the recession and the time the NBER announced it would begin (22 months in the case of the 2001 recession).
Can negative GDP growth for 2 consecutive quarters in early 2022 be viewed as a new recession in the US? If it is not a recession – what is it? If it is a new recession, what explains its unconventional nature, when will it end, and when can we expect the next recession? Is the financial crisis of early 2022 legitimate and when can we expect the next crisis?
In our next edition, we will answer these and other questions about the near future of the U.S. economy in the CMI business cycle model.