On July 28, the US Bureau of Economic Analysis (BEA) It publishes its advance estimates of GDP growth for the second quarter. The impending announcement has watchers on the edge of their seats, and many hope it will confirm that the US economy entered a recession in the first half of 2022. But if that is the announcement, the reality is that the reality is more complex.
Recession forecasts are based on two assumptions: growth in the first quarter was negative, and a recession is defined when there have been two consecutive quarters of negative growth. As a result, if growth in the second quarter is expected to be negative, the stock and bond markets may react higher in the very short term. A recession may lead investors to believe that the US Federal Reserve will ease its sharp interest rate hikes.
But there are three main flaws in this reasoning. First, growth is likely to be both positive and negative in the second quarter. Yes, the Atlanta Federal Reserve’s real GDP growth rate model estimates an annualized growth rate of 1.5% in the second quarter, based on data available as of July 15. However, some economists – myself included – would say that growth was likely to be positive in the second quarter.
Revisions have shifted gross domestic product (GDP) in the direction of gross domestic income (GDI) more 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 recession in the US is not defined as two consecutive quarters of negative growth.
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It is true that the two-quarters-in-a-row rule is used to determine whether most advanced economies – especially in Europe – are in recession. But it is not the main standard in all countries. It certainly isn’t in the United States, where the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee determines it based on a variety of other indicators, a paper officially recognized by the Bureau of Economic Analysis. (It’s worth noting that private nonprofits like NBER also produce other important economic indicators, such as the Consumer Confidence Index and the Purchasing Managers’ Index.)
It can be argued that the NBER approach produces ratings that are more accurate than the simplified rule for two consecutive quarters. This was demonstrated, for example, in 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. However, if one looks at a variety of indicators, especially with regard to employment, it is clear that there has already been a recession. NBER acknowledged this.
It is still natural to see output growth as the most important indicator of a recession. But even if one relies on the two-quarters rule, there is still a third error in assuming that The US 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 to measure production. The thing that gets all the attention in a North American country is GDP, which is measured on the product side, i.e. adding up the sectors in which goods and services are sold. Using this measure, annual US GDP growth was negative in the first quarter, coming in at -1.6%.
But growth can also be measured by gross domestic income (GDI), which is calculated on the revenue side, that is, by adding a portion 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 was significant in the first quarter of 2022, with GDI growing by 1.8%. The average of the two measures, known as gross domestic product (GDO), was also positive.
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Here comes the important part. GDP data has long been considered by experts, including in the US government, as useful for measuring economic output as GDP. So did the NBER Committee, which takes GDO into account when setting quarterly tipping point dates.
This has two effects on the BEA estimate. The first is that even if it showed that GDP growth has been negative for two consecutive quarters, the NBER Committee is unlikely to conclude that the recession began in the first quarter of 2022. This conclusion would be inconsistent with what has been stated. In the Human Development Index, employment growth and other economic indicators for the first quarter.
Second, the GDP figures will be revised soon. This is a routine procedure and revisions are substantive: the absolute average revision for a given quarter – up to the transition from the third update to the last BEA update (after the mid-year “standard revisions”) – is 1.2 percentage points, for a sample ending in 2018. This is the main reason why The NBER panel is waiting a long time — 11 months on average — before calling the tipping points.
When the Egyptian Accounting Office (BEA) conducts the comprehensive “benchmarking review” of national income and product accounts – this year, results will be released in September, rather than July – it may review first-quarter GDP growth to the upside. , perhaps even enough to turn it into a positive. Historically, revisions have moved GDP in the direction of the HDI more than the other way around. In this sense, the Human Development Index (GDI) may be a more reliable measure of domestic production than GDP.
Get ready for headlines saying the US economy is in recession, with all the public and market reactions to be released. But don’t be surprised if you are told otherwise after two months.
© Syndicate ProjectCambridge
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.
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