The Morning: The big economic question

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July 29, 2022

By David Leonhardt

Good morning. The big question is not whether the U.S. is in a recession. It's whether the economy will soon worsen.

The Villanueva family at a market in Alamo, Texas.Verónica G. Cárdenas for The New York Times

A vicious cycle?

The latest G.D.P. numbers — suggesting that the economy shrank in each of the past two quarters — have intensified a debate about whether the U.S. economy has fallen into a recession.

Today's newsletter will briefly explain that debate. But I also want to explain why some of this discussion is semantic and without much relevance to most Americans. The more important question is simpler: Are the economy's problems likely to get worse in coming months or will the situation stabilize and possibly even improve?

That question has tangible effects for people's lives. It may influence your decisions about whether to buy a house or car, whether to look for a new job and whether to become more cautious in your spending. There is no clear answer, but there is some useful information.

It helps to start with a basic framework: The country's economic policymakers want the economy to weaken, just not too much.

The main economic problem in recent months has been an overheated economy, with more demand for goods than supply of them, leading to the highest levels of inflation since the early 1980s. To bring down inflation, the Federal Reserve has been raising interest rates, which leads families to spend less money and, in turn, causes prices to stop rising so rapidly.

"We have high inflation and historically high inflation," Cecilia Rouse, chair of the White House Council of Economic Advisers, told me and other journalists yesterday. "In order to bring down inflation, we understand the economy needs to cool."

But it is very hard for the Fed officials to get the balance right. They are trying to cause a large enough decline in spending to reduce inflation but not such a large decline that companies cut jobs, unemployment rises and the economy falls into a vicious cycle.

When people talk about whether the economy is entering a recession, the tangible underlying question is whether that sort of vicious cycle is beginning. So far, it does not appear to have done so. Yet the risks over the rest of 2022 are substantial.

Deep, broad, sustained

There is no single definition of a recession. One informal definition is two consecutive quarters of shrinking gross domestic product (a measure of the economy's output). With yesterday's G.D.P. report, the economy met that standard.

Most economists, however, don't like the two-quarters definition. They consider it too narrow because it is based on a single economic indicator. Any one indicator, even G.D.P., can sometimes be misleading.

Right now, G.D.P. may be overstating the economy's problems for a couple of technical, temporary reasons involving global trade and corporate inventories, Mark Zandi, the chief economist of Moody's Analytics, said. Another broad measure of the economy, known as gross domestic income, has not been declining in recent months, and it tends to be less volatile than the initial estimates of G.D.P. (Yesterday's number was an initial estimate, and the government will revise it — maybe even to a positive number — as more information comes in.)

The volatility of the initial G.D.P. numbers is why economists generally prefer a different definition of recession. The National Bureau of Economic Research, a private nonprofit, appoints a small standing committee of academic economists who make pronouncements that many other experts treat as official. The N.B.E.R. defines a recession as a significant, persistent and broad decline in economic activity, and the committee members tend to wait months, until enough data is available, to declare a recession to have started.

(My colleague Ben Casselman wrote a good explainer of recession definitions this week.)

One big reason to doubt that the economy has already entered a recession is the strength of almost every indicator other than G.D.P. Consumer and business spending, for example, are both still rising, as is employment. "It is difficult to see how we suffered a recession during the first half of this year when the economy created so many jobs, unfilled positions were at a record high and layoffs near record lows," Zandi said.

As you can see in this chart by my colleague Ashley Wu, the last few months of the job market bear little resemblance to the run-up of other recent recessions:

Chart shows three-month averages. Data is seasonally adjusted and excludes some jobs. Early 2020 data exceeds chart bounds. | Source: Bureau of Labor Statistics

The Anxious Index

There is one caveat: Professional economists are almost always late in recognizing the start of a recession. Why? They are making judgments based on delayed data, and, like other human beings, they are susceptible to irrational optimism.

Historically, when economic forecasters have said that the odds of a near-term recession are at least 30 percent, it means that a recession is actually more likely than not. I've referred to that number in the past as the Anxious Index. What is it now? About 44 percent, according to the most recent Wall Street Journal survey of forecasters. The Anxious Index is flashing red.

"Are we in a recession? We don't think so yet. Are we going to be in one? It's a high risk," Joel Prakken, the chief U.S. economist for S&P Global Market Intelligence, told Ben Casselman.

The Fed's interest-rate increases — combined with the high energy prices caused by Russia's invasion of Ukraine and the continuing Covid disruptions around the world — have created a significant chance of a vicious cycle of spending cuts and jobs cuts. The Fed, of course, is still hoping to avoid that outcome and achieve a so-called soft landing of lower inflation and continued economic growth. But, as Michael Feroli, an economist at J.P. Morgan, told my colleague Jeanna Smialek, "The degree of difficulty has probably increased."

It's a strange moment for the economy. On the one hand, the G.D.P. numbers seem to have exaggerated the economy's weaknesses over the past six months. On the other hand, there are legitimate reasons to worry about the economy over the next six months.

THE LATEST NEWS

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Senator Chuck Schumer, the Democratic leader.Haiyun Jiang/The New York Times

Behind the scenes of the climate deal: Over 10 days, a small group of Democrats met secretly with Senator Joe Manchin.
A loophole allows hedge fund managers to pay lower tax rates than entry-level employees. The Democrats' new bill narrows it.
As the Justice Department investigates the 2020 election, officials know that any misstep could sway the 2024 race.
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MORNING READS

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Dog rescue: Thousands of mistreated beagles need homes. These people are stepping up.

A Covid story: His secret changed his friend's life.

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Modern Love: A polygraph test that saved a marriage.

A Times classic: How to start knitting and love it.

Lives Lived: Phyo Zeya Thaw was a hip-hop star whose pro-democracy activism took him into Myanmar's Parliament. After the coup last year, he joined the resistance. He died at 41, executed by the military junta.

SPORTS NEWS FROM THE ATHLETIC

All rise: Aaron Judge's league-leading 39th home run gave the Yankees a walk-off win last night in the Bronx. What Judge is doing in light of his murky contractual future is incredible — he's currently the favorite to win A.L. M.V.P.

DK Metcalf gets paid: One of the N.F.L.'s best young wide receivers agreed to a huge extension for just three seasons, meaning he'll re-enter free agency while still in his prime. It's seen as a win for both the player and franchise.

Kyler Murray's homework nixed: The Cardinals removed a controversial clause — which had sparked outrage from fans and pundits alike — from their star quarterback's new contract.

ARTS AND IDEAS

Beyoncé at the Oscars this year.Mason Poole/A.M.P.A.S. via Getty Images

A new Beyoncé album

"Renaissance," Beyoncé's seventh solo album, is here. Unlike the lead-up to her past few releases, this one has been oddly conventional: She announced the album ahead of time and dropped "Break My Soul," a single inspired by 1990s dance music. She even joined TikTok.

Beyoncé's previous unorthodox ways, including surprise visual albums and exclusivity deals with streaming services, have distanced her a bit from the mainstream commercial market. Her last No. 1 single was "Single Ladies" in 2008, despite her continued prestige.

"She's still the leader of the culture," Danyel Smith, a music journalist, told The Times. "There are people that exist in this world to shift the culture, to shift the vibe."

For more: The album is the first of three projects that she created during the pandemic. And Times critics and reporters debate which Beyoncé album is definitive.