Mistaken analysts are shouting “recession!”
Real GDP (gross domestic product) declined in the first quarter. They heard it’s headed in the same direction for the current quarter.
“Two down quarters is a recession,” they proclaim.
But economists and analysts who study the economy know it’s not that easy.
There were two down quarters in a row in 1947 without one. And we didn’t see two quarters in a row of declines during the 2001 dot-com recession.
It’s more than declines in GDP.
2001 Recession Lacked GDP Decline in Consecutive Quarters
Source: Federal Reserve.
What Defines a Recession
A recession is a pronounced, pervasive and persistent period of economic weakness.
Pronounced means we see significant declines in several economic indicators including income, employment and retail sales.
All those indicators are part of GDP. Pronounced declines in two of them could drive an economic contraction.
Requiring multiple confirmations ensures the broad economy is contracting.
Pervasiveness means the weakness is widespread in different industries and regions.
Persistent weakness means it lasts for five months at a minimum.
It’s true that real GDP contracted. However, we aren’t in a recession.
Here’s why.
3 Reasons It Isn’t Here Yet
- Unemployment is low and has been falling since April 2020. The economy created 390,000 jobs in May. Job losses are a requirement for a recession.
- Real personal income is income after inflation (excluding government transfer payments such as unemployment insurance, which was up 0.1% in May.) It’s up 1.8% in the past year. Declines are also a requirement for a recession.
- Industrial production is up 5.4% year over year. The pace of expansion is slowing but remains positive.
Now, real retail sales are down 5.4% compared to a year ago and down 1.2% in the past month. That is consistent with a recession, which is bad news.
Bottom line: Many consumers believe we’re already in a recession. We aren’t.
The pain of a recession is in our future.
Michael Carr is the editor of True Options Masters, One Trade, Precision Profits and Market Leaders. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.