For the first time since 2009, the U.S. gross domestic product was negative for two quarters in a row. After dropping 1.6% during the first quarter of 2022, the GDP fell another 0.9% in the second quarter, according to the Bureau of Economic Analysis.
Though the U.S. has met one common definition of a recession — two consecutive quarters of negative GDP growth — in some ways, the current economy doesn’t mirror that of previous recessions and a formal recession has not yet been declared.
During the recession that began in 2007, major businesses went bankrupt, unemployment was high and property foreclosures were rampant. A formal recession was declared during the coronavirus pandemic in 2020, but it lasted just two months and was not characterized by two quarters of negative GDP growth.
“It doesn’t feel like a recession,” says Kristina Hooper, chief global market strategist for investment firm Invesco. “That said, it does feel like a substantial slowdown.”
There may be little difference between a minor recession and a substantial slowdown, according to Hooper, and the future direction of the economy may rest on how the Federal Reserve chooses to address inflation in the coming months.
For American families, rising interest rates and inflation are at the forefront of their economic concerns. And while a declining GDP can signal coming problems, falling GDP alone shouldn’t affect the daily lives of consumers.
How a Recession Is Defined
In many macroeconomics textbooks, a recession is defined as two consecutive quarters of negative growth in the GDP, according to Dawit Kebede, senior economist for the Credit Union National Association. That means, by the textbook definition, the U.S. is in a recession.
But the National Bureau of Economic Research, a nonprofit that is often looked to for business cycle tracking and the formal declaration of a recession’s start and end, uses a more complex definition, considering many factors alongside GDP figures. These factors include real personal income less transfers, real personal consumption expenditures and household employment.
According to its website, “The NBER’s traditional definition of a recession is that it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months. The committee’s view is that while each of the three criteria–depth, diffusion, and duration–needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.”
Using the NBER’s definition, some financial observers — Kebede included — say the current economic conditions don’t rise to the level of a recession. “We are not in a recession because the labor market is strong and consumption is strong,” he says.
In the latest data released by the BEA, personal income increased 0.6% in June while personal consumption expenditures, a measure of consumer spending, rose 1.1%. The current unemployment rate is 3.6%, according to the Bureau of Labor Statistics. During the recession that began in 2007, unemployment peaked at 10%.
“There are definitely a number of disconnects going on right now,” Hooper says, adding that current economic indicators are not all heading in the same direction, which makes interpreting the state of the economy more difficult.
[Read: How to Prepare for a Recession]
What a Declining GDP Means for Consumers
The GDP is a measure of the total monetary value of goods and services created by a country. A declining GDP could mean businesses are pulling back on production and that, in turn, could have cascading effects such as worker layoffs.
In the case of the recent downturn, there may be a temporary issue to blame rather than deeper economic troubles.
“Businesses accelerated a lot of inventory in the (previous) quarter, and that is a drag on the economy,” Kebede says. In other words, companies purchased more inventory earlier in the year which means they didn’t need to order as much in recent months.
Specific GDP categories can further illuminate the source of the economy’s contraction. While the goods categories saw a decline, services, on the other hand, saw 4.1% growth in the second quarter of 2022.
Economy Not in the Clear Yet
Negative growth in the GDP could be just a temporary hiccup, but U.S. families still face rapidly rising costs in areas like housing, groceries and transportation.
“Inflation is a real problem,” Hooper says. She also notes that while the labor market is strong now, employment is often a lagging indicator of a poor economy.
The year-over-year inflation rate for June was 9.1%, a 40-year high. Higher costs could lead consumers to purchase fewer goods and services, either by necessity or because of a pessimistic view of where the county is headed. Consumption accounts for approximately two-thirds of the economy, which means if people stop spending, it could put the brakes on any economic growth.
Rising interest rates can also deter consumption, and the Fed has already increased the federal funds rate four times this year. These increases are intended to curb inflation, but they can also slow the economy.
Higher interest rates may mean people don’t spend as much, and lower consumer spending can lead to companies producing fewer goods or services to sell. If businesses are producing less, they won’t need as many workers. That increases unemployment which results in less money for consumers to spend and further reinforces this negative economic cycle.
For now, though, there may be no need to panic. If the current situation seems dire, Hooper notes, “We are in a far better situation than we were in July 2020.”
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Are We in a Recession? Here’s What 2 Quarters of Negative GDP Mean for You originally appeared on usnews.com