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Is It a Recession? Maybe Not Yet.

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Ben Tafoya
August 8, 2022

The difference between the current economic situation in the United States and a recession is statistically interesting but not significant if you are suffering from stagnating wages and higher prices. The recent release of GDP statistics from the Bureau of Economic Analysis indicated that in Q2 2022 the economy saw the second straight quarter of economic decline. That is usually enough evidence to convince the broad public that a recession is here but the final determination rests with the National Bureau of Economic Research (NBER) and they look much deeper at the state of the economy before making a decision.

According to the NBER, the gauge for economic activity includes… “real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes and industrial production.” All these measures are from federal government statistics, and many are widely discussed as they are released. The measures are contradictory and for example, the July employment report from the Bureau of Labor Statistics registered a surprisingly large gain in total employment.

GDP numbers measure changes in economic activity in specific categories. In the event of a recession you will see declines in one or more of these categories. For example, “Consumption” represents the largest component in the United States and is driven by consumer demand. If consumers ease off consumption, due to concerns about higher levels of unemployment, then there can be reductions in expenditures. Same for “Investment” by business where concerns about future expectations result in lower spending on plant and equipment. For public administrators the bigger concern may be the level of spending of “Government” at all levels. If there are austerity measures as a result of lower tax collections, that can result in further recessionary pressures.

The distinctive nature of the current situation is that while there are dips in some categories such as business inventories and residential home construction, there are not yet widely seen declines in production. The Federal Reserve measures overall and manufacturing production and its indices of capacity and utilization are near all-time highs. Moreover, the recent employment report indicated wage gains over the past year of over 5 percent indicating a moderately strong labor market. Unemployment is a lagging indicator for a recession meaning it tends to rise only once we are in a recession, not before it starts.

By closely looking at the GDP reports so far this year one can see the decline is in “real” or inflation adjusted GDP. This indicates that while overall economic activity is increasing, the rate of inflation is increasing more quickly, so the numbers tell us that this is a very small decline in the economy during the first and second quarters. This helps explain in part the anomaly of two quarters of decline and a strong labor market and reasonable production numbers.

Workers are not faring all that well, however. The increase in wages so far in 2022 has been out run by inflation. The price index used to measure GDP increased at roughly 8 percent during this period. This is one way that people feel we are in a recession when we might not technically be there. When standard of living suffers the technical definitions matter far less than personal experience.

Even the employment news is not uniformly positive. Government represents one of the slowest growth sectors for employment. While the overall employed workforce grew by 5.8 million people over the past year, federal and state governments had no gain in the number of workers over the past year. Local government, across the entire country only saw an increase of 150,000 workers. This levelling of government activity is also displayed through the GDP numbers which shows the sector flat over the past year. This indicates that government is a drag on the economy at a time when the increase in interest rates, decline of housing production and relatively high inflation particularly in rents are real threats that government action is required to offset.

Congress is at work on major legislation that will begin to address inflation. By allowing Medicare to start the process of negotiating for drug prices and subsidizing more of the shift away from fossil fuels this bill represents significant investment in critical infrastructure for the future. These actions are designed to put downward pressure on prices. According to the AAA there have been significant drops in price for oil and gasoline during the last several weeks offering some hope that inflation could moderate without a more significant downturn.

With these investments through ARPA, the infrastructure law and the inflation bill alongside the increases in state tax revenues there are healthy signs for state budgets. California, Idaho, Massachusetts, Connecticut, Florida and many others logged surpluses in the fiscal year that ended in June. If this money can be used to buffer the coming year or so, state and local government can help the economy avoid the full force of a recession in 2023.

Author: Dr. Ben Tafoya is an adjunct faculty member at both Northeastern University and Wentworth Institute. Ben is the author of a chapter on social equity and public administration in the recently published volume from Birkdale, Public Affairs Practicum. He can be reached at [email protected] or Twitter as @policyben . All opinions and mistakes are his alone.

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