what it is
Paul Krugman had a good recent article in the New York Times on this topic, basically saying that what we’re going through now in the US isn’t a recession, even though the economy is slowing down from its torrid (my word) GDP growth rate of last year.
The common understanding of media commentators is that two consecutive quarters of negative GDP growth define what a recession is. The main virtues of this definition are that it’s simple, the numbers are readily available shortly after a quarter ends and it works more often than not. Plus, you don’t have to know much about economics and the conversation can’t stray into stuff like what the commentator’s training or experience might be.
are we in one?
My guess is that the present case is one of those “than nots.”
The US dipped into the minus column in 1Q22 and appears to have done so again in 2Q22, although a bit less deeply. For the media, then, we’re experiencing a recession. That’s even though we’re not seeing businesses in general beginning to shut their doors and lay workers off.
I see the current situation as unusually complex, even disregarding the external shocks coming from the invasion of Ukraine and the resulting upward pressure on energy and grain prices. Here’s why:
Real GDP growth is a function of two variables: growth in the working population and growth in productivity (meaning investment in plant and equipment or in worker education/training). In the US, annual real GDP growth is maybe 2%, comprised of 1.5% growth in the workforce (half from the domestic population, half from immigration) plus, say, 0.5% from productivity.
During the Trump administration, growth averaged about 1.5% annually, despite stimulus from the 2018 income tax cuts and continuous White House pressure on the Fed to maintain an accommodative monetary policy. The ban on immigration seems to me to be the chief culprit in this sub-par performance, although tariff wars didn’t help matters nor did the administration’s overt white racism. And, as it turned out, real GDP at the end of Trump’s term was actually slightly lower than at its beginning, due to his epic mishandling of the covid epidemic.
My editorializing aside, the main point is that without a system overhaul, 1.5% is probably the best the country can do without creating inflation. In 2021, however, US GDP grew by 3.5%, or well over twice as fast as the present economy can handle without inflation. It shouldn’t be a huge surprise, then, that nominal GDP grew by 10%+ in 1Q22, meaning ballooning, 8%-ish, inflation–some of which was admittedly not home-grown (meaning a result of high-octane domestic fiscal stimulation), but the result of the invasion of Ukraine.
The issue with inflation is that it tends to accelerate if left unchecked, and tends over a period of years to transmute into something like the unholy economic mess that inflation-stoking government policy creates in the US in the late 1970s.
A simple-minded way of looking at things, my go-to approach, is that the most straightforward way of getting the country out of rising inflation mode is to have a 16 month period in which in which the US has no real GDP growth. So basically another year like the first half of 2022. I think this is the Fed’s aim.
In my experience Washington has never been able to engineer a non-bumpy return to normal. So a full year where GDP declines by, say, 1%, shouldn’t come as a shock.
Two issues:
–what has Wall Street factored into today’s prices? …a lot is my guess
–how does oil play into this?
more tomorrow