As you no doubt heard, US real gross domestic product (GDP) shrank for the second consecutive quarter, falling by 0.2% in the June period after a decline of 0.4% three months earlier.For many people, this is a clear indicator that the country is in a recession.But according to the committee that's responsible for making the official call on what constitutes a recession, it is more complicated than that.
Has the US entered another recession?That committee is the Business Cycle Dating Committee, part of the US National Bureau of Economic Research (NBER). Back in November 2001, the eight-member group of economists sought to clarify how it defines recession. Interestingly, the members said that they gave "relatively little weight to real GDP because it is only measured quarterly and is subject to continuing, large revisions."So if not GDP, what do they look at?Employment and wages rose, but business conditions contracted in JulyAccording to the committee, a recession is "a significant decline in activity spread across the economy." This decline, it adds, is "visible in industrial production, employment, real income and wholesale-retail trade."Some of the areas mentioned above are now strong, while others are clearly slowing down.On the plus side, the US labor market remains robust, and wages and salaries continue to grow. In the second quarter, the Employment Cost Index (ECI), which measures total compensation for private workers in all industries and occupations, rose by 5.5% compared to the same quarter last year. Wages and salaries in the US surged.
On the other hand, business activity appears to be slowing. The preliminary reading of the overall US business market shows that conditions deteriorated in July. The Flash US PMI Composite Output Index, which combines the services and manufacturing industries, totaled 47.5, the first contraction since June 2020.US business conditions contracted in July for the first time since the start of the coronavirus pandemic.
Hope for the best, prepare for the worst.So, again, has the US economy entered a recession? The best answer to this question is: maybe. There are conflicting signals. According to economists, inflation-adjusted GDP has indeed fallen for two straight quarters. However, it does not mean that a pullback has begun.In fact, it is possible, although rare, for the economy to experience two quarters of negative growth and still not officially be in recession. The last time this happened was in 1947.Similarly, the US economy can slip into a recession without recording a decline in GDP for two quarters. This happened in 2001 during the dotcom bubble.Now, as in the past, there is a lot of controversy and disagreement right now surrounding the exact characteristics of a recession, just as there has been in the past.For instance, a member of the Reagan administration tried to lobby the head of the NBER to roll the 1981-1982 recession into the 1980 recession, which occurred before President Ronald Reagan took office, so that it could be blamed on his predecessor.Today, many people want to be able to blame the Biden administration for an economic slowdown. They may get that chance.Currently, the most important thing any of us as investors can do is hope for the best and prepare for the worst.
