On July 28, the US Bureau of Economic Analysis (BEA) will publish its advance estimate of GDP growth for the second quarter. The imminent announcement has observers on the edge of their seats, with many hoping it will confirm that the US economy entered a recession in the first half of 2022. But if that was the announcement, the truth is that the reality is much more complicated.
The recession forecast is based on two assumptions: first-quarter growth was negative, and a recession is defined when there are two consecutive quarters of negative growth. As a result, if second quarter growth is estimated to have been negative, stock and bond markets could react higher in the very short term. A recession could lead investors to believe that the US Federal Reserve will ease its aggressive interest rate hikes.
But there are three main flaws in this reasoning. First, growth is likely to have been both positive and negative in the second quarter. Yes, the Atlanta Fed’s Real Gross Domestic Product Growth Rate (GDPNow) model estimates a -1.5 percent annual growth rate in the second quarter, based on available data through July 15. However, some economists—myself included—would say that growth was more likely to have been positive in the second quarter.
Revisions have moved gross domestic product (GDP) in the direction of gross domestic income (GDI) more often than vice versa
However, even if the BEA estimate is negative, it does not necessarily mean that the United States has entered a recession. This is because – and this is the second flaw – a US recession is not defined as two consecutive quarters of negative growth.
(More news: Dollar closes the week with a rise of $28.6 compared to Monday’s price).
It’s true that the two-quarters-in-a-row rule is used to determine whether most advanced economies—particularly in Europe—are in recession. But it is not the main criterion in all countries. It certainly isn’t in the US, where the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee determines it based on a variety of other indicators, a paper the Bureau of Economic Analysis officially recognizes. (It’s worth noting that private nonprofit institutions like the NBER also produce other important economic indicators, like the Consumer Confidence Index and the Purchasing Managers’ Index.)
Arguably, the NBER approach produces more accurate assessments than the simplistic rule of two consecutive quarters. This was demonstrated, for example, by the 2001 recession, when it failed the two-quarter test, because GDP growth was negative in the first and third quarters of that year, but positive in the second quarter. However, if one looks at a variety of indicators, especially on employment, it is clear that there was indeed a recession. The NBER acknowledged it.
It is still natural to see output growth as the most important indicator of a recession. But even if one relies on the two-quarter rule, there is still a third error in the assumption that The United States entered a recession in the first half of 2022: Contrary to popular belief, growth in the first quarter was not necessarily negative.
We must start from the fact that there are two ways of measuring production. The one that receives all the attention in the North American country is the GDP, which is measured on the product side, that is, adding the sectors in which goods and services are sold. Using that measure, annual US GDP growth was negative in the first quarter, coming in at -1.6 percent.
But growth can also be measured by gross domestic income (GDI), which is calculated on the revenue side, that is, by adding some of it, such as employee compensation. In theory, the two measurements should be exactly the same. But in practice, there is a statistical discrepancy, which in the first quarter of 2022 was large, with GDI growth of 1.8%. The average of the two measures, known as gross domestic output (GDO), was also positive.
(Also: Why is the dollar bill green?).
Here comes the important part. Experts, including in the US government, have long considered gross domestic income data as informative for measuring economic output as gross domestic product. So has the NBER committee, which considers the GDO when determining quarterly turning point dates.
This has two implications for the estimation of the BEA. The first is that, even if it shows that GDP growth has been negative for two consecutive quarters, the NBER committee is highly unlikely to conclude that a recession started in the first quarter of 2022. That conclusion would be out of line with what was stated. in the GDI, employment growth and other economic indicators for the first quarter.
Second, the GDP figures will be revised soon. This is routine and the revisions are substantial: the mean absolute revision for a given quarter—even going from the third to the last BEA update (after the mid-year “benchmark revisions”)—is 1.2 percentage points, for a sample ending in 2018. This is the main reason the NBER committee waits so long — 11 months, on average — before calling tipping points.
When the BEA carries out its comprehensive “benchmark review” of the National Income and Product Accounts—this year, the results will be released in September, rather than July—it may well revise first-quarter GDP growth on the upside. , possibly even enough to turn it positive. Historically, revisions have moved GDP in the direction of the GDI more often than vice versa. In that sense, the GDI may be a more reliable measure of domestic production than GDP.
Get ready for headlines that say the US economy is in a recession, with all the public and market reactions that will be triggered. But don’t be surprised if you’re told otherwise two months later.
JEFFREY FRANKEL
© PROJECT SYNDICATECAMBRIDGE
Professor of Capital Formation and Growth at Harvard University. He was a member of President Bill Clinton’s Council of Economic Advisers. He is a research associate at the US National Bureau of Economic Research.
More news in depth
-Digital dollars: what are they, what are their advantages and other doubts
#United #States #recession