Inflation-adjusted (real) GDP dipped 0.9 percent in the second quarter (Q2) after declining 1.6 percent in the first quarter, igniting debate over whether we are in a recession. We may not be in a recession but rather degrowth.
A recession is a broad economic decline, the contraction phase of the business cycle. This differs from a slump concentrated in one sector or region of the country. Economists have no strict definition of recession and typically use the determinations of the National Bureau of Economic Research’s Business Cycle Dating Committee. Recessions are declared retrospectively; for instance, because the Q2 decline was preliminary, final GDP may not show decline.
Yet as the American Institute for Economic Research’s Phil Magness observes, Federal programs employing a strict definition use two consecutive quarters of decline. Several European nations also use this standard.
How broad is the current decline? Of the four major components of GDP, two rose in Q2, consumption and net exports, and two declined, investment and government purchases. The decline in investment dominated the others. Digging deeper, the Commerce Department reports 32 subcategories of GDP, with 16 lower in Q2. Investment declines often drive recessions. Durable goods purchases (e.g. appliances) also decline during recessions and fell in Q2. Both suggest a recession.
Treasury Secretary Janet Yellen contends that the strong job market shows we are not in a recession. Yet unemployment is a lagging variable; it starts rising after GDP is declining and hiring picks up only after recovery begins. An economy entering recession is still strong because the business cycle is based on changes in and not the level of economic activity.
A quote from economist Arthur Okun, courtesy of Phil Magness, provides perspective on recession denial. Professor Okun, who served under Lyndon Johnson, observed, “When Administration spokesmen begin to split hairs about what a recession is, you can be sure there will be one.”
We are experiencing the declining living standards typical of recessions. Real per capita disposable income fell nearly 4 percent over the past year due to inflation. And the emergence of shortages suggests that this understates the decline. Economists normally compare market-clearing prices at which goods are available for purchase. Products consistently out of stock suggest we no longer have equilibrium prices.
Economic statistics often miss consumer harm from shortages. For example, if you may buy Pepsi for the same price if Coke is “out of stock” and not lower GDP. The time a frantic parent spends driving to find baby formula does not enter GDP. Nor does parents’ fear and dread over finding formula next week.
To estimate the actual decline in living standards, imagine how much prices would have risen to keep formula, new cars, and dog food in stock. Inflation would have exceeded 9 percent, yielding a larger decline in real income. Many Americans are already suffering the pain of a deep recession.
But this may not be a recession. Why? America’s economy has grown throughout our history; recessions are the brief (except for the Great Depression) exceptions. Declining living standards may be the new normal, and by design. We may be experiencing degrowth, not a recession.
The World Economic Forum defines degrowth as “shrinking rather than growing economies, so we use less of the world’s energy and resources and put wellbeing ahead of profit.” Lower resource use is called sustainability. Proponents of a “Great Reset” to fundamentally change the world’s economic system are, I think, exploiting fears of cataclysmic climate change.
Markets are based on voluntary exchange. Buyers willingly pay a price high enough to induce suppliers to produce goods and services. Market economies generated the unprecedented increase in human well-being over the past 250 years.
Sustainability advocates hate this production. Their desired economic system lets those in charge (them) tell people what they can have. Achieving sustainability will require years of degrowth, so periods of falling output will no longer be exceptional. The Biden Administration’s recession denial may tip off our transition to degrowth.