Redefining your way out of recession

On 24 July, the US announced the much-anticipated 2022 second quarter advanced estimate, the results of which were a 0.9% negative growth in real output. The technical definition of an economic recession being a fall in economic growth over two consecutive quarters was officially reached. 

While this news did spook the market to some extent as evident in a short blip in activity, this did not have the usual devastating effect of the usual announcement of recession. This is credited to the fact that the looming recession being finally reached was categorically denied by White House officials and major economists alike, a strategy that seems closer to home than that previously incorporated by the Western economies. 

Through challenging the definition of what a recession actually is, Treasury Secretary Janet Yellen indicated that the economy was only “in a period of transition” during a White House press briefing. “I would be amazed if they would declare this period to be a recession, even if it happens to have two quarters of negative growth,” Yellen said, pointing out that the economy had rapidly grown by 5.5% in the last year alone. 

This assertion was welcomed by many. According to the National Bureau of Economic Research (NBER) a recession is defined as a significant decline in economic activity that is spread across the economy and lasts more than a few months; holding that this definition is more in line and adaptive to the current context. It is also used to successfully meet the criteria of past recessions, such as that declared in 2001 without there being a consecutive decline in GDP. 

The NBER says that a recession is normally visible in real GPD, but also present in real income levels, employment, industrial production and wholesale-retail sales data that needs to be considered. Real GDP therefore is only one of four to six additional economic data points the government should consider in its policy decisions. 

While this mixed bag of indicators is likely to give a more comprehensive view of the economic situation, the indicators in question do not necessarily move in tandem. While some point to the economic situation worsening, others seem to illustrate a rosy picture; ultimately the sum of the parts is used to assess the whole. Everything must be considered to arrive at the big picture. 

According to Moody’s Analytics Chief Economist Mark Zandi, a recession was not seen for the first half of the year, but odds are rising that there will be one by the end of 2022. The highlighted reason for the disagreement on whether a recession has arrived was job creation. With 457,000 jobs a month added this year the economy is growing, albeit it is still not back to pre-COVID levels. 

Even with companies such as Meta – the parent company of Facebook – and Twitter announcing hiring freezes and Netflix announcing massive layoffs, many are convinced these are sector specific actions. The tech space which experienced growth against the job slump brought out by COVID, is described to be easing off the excess workers as its expansion, which was interpreted to be a permanent fixture, was short-lived. 

Real personal consumption expenditures, which measure consumer spending too sees consumer spending increasing now. A more favourable level would be around 2%, the benchmark for growth and inflation. During a recession this tends to be low, flat and even in decline as consumers are spending little to no money at all. Higher interest rates, persistent inflation, and a historically sour mood on behalf of consumers and businesses, however, do pose major dangers ahead. For the average person, while the technical definition of such economic terminology is not important, the tangible results of such an announcement are. Recession or not, this creates almost a prophesy that is fulfilled as individuals and institutions adjust their lifestyles and spending patterns accordingly. In more extreme cases, economic actors are likely to feel its full force as they are laid off work and alter discretionary spending.