Last week’s report on economic output recharged speculation about whether the U.S. economy is in a recession. Gross domestic product shrank for the second quarter in a row, a common, but unofficial, definition of a recession.
But GDP isn’t the only measure that matters, especially in the tangled mess of the pandemic economy.
The National Bureau of Economic Research (NBER) has the final say on whether a period of economic decline is a recession, a determination that can lag for months. NBER economists consult a wide range of indicators that suggest this year’s economy stands on sturdier ground than in recent recessions.
Americans feel bad about the economy, and there’s no doubt that soaring prices on everyday essentials are making it harder to get by. But a recession isn’t a measure of how hard it is to make ends meet. It is, as defined by NBER, a downturn that is deep, diffused and lasts for at least a few months.
But there is no exact formula for a recession. For instance, two months in early 2020 were declared a recession, despite being so brief, because the economic decline from the pandemic was so drastic and far-reaching.
“Every recession is unhappy in its own way,” said David Wilcox, senior economist with the Peterson Institute for International Economics and Bloomberg Economics. “It’s important for the Business Cycle Dating Committee to sift through the indicators and make their decision in a flexible way.”
We took a look at where the indicators used by the decision-makers at NBER stand today, compared with recessions over the past 50 years. This year’s economy is far from bulletproof — but it is strikingly different from hard times in the past.
The overall size of the economy
Gross domestic product measures the country’s economic growth by tallying up the value of all its goods and services. It has declined the past two quarters, but GDP often has big revisions after its initial release, averaging a full percentage point of change between the first estimate and its final revision months later.
NBER also takes into account GDP’s less prominent cousin, gross domestic income (GDI), which measures the same thing — economic growth — from a different angle: how much money was earned by making those goods and providing those services.
In practice, the measures aren’t quite equal, but this year they’re pointing in opposite directions: GDP says the economy is shrinking, while GDI says it’s growing.
Averaging the GDP and GDI together, as NBER does, suggests the economy has largely stayed the same in the first three months of the year. Gross domestic income for the second quarter has yet to be reported.
Employment shows a much stronger picture, especially when compared with past recessions.
NBER looks at two different measures of employment: payrolls reported by businesses and direct household surveys. Both are a big contrast with the job losses seen in the first six months of most previous recessions.
There are signs that last year’s frenetic labor market is easing: job openings dipped slightly in June after months of record highs, and tech companies are slowing their growth. But unemployment remains at a pandemic low.
“Employment is usually a contemporaneous indicator,” Wilcox said. “If the overall economy was contracting, you’d see it in employment.”
Earning and buying, making and selling
Total income offers an additional angle on employment, because it reflects reductions in working hours that might not result in job losses. And income has largely held steady, even after adjusting for inflation.
Consumer spending remains close to its all-time pandemic highs. Rising prices are putting many households under economic strain, however. Essentials like groceries and gas are taking up a greater part of household budgets, potentially crowding out discretionary spending on goods.
Industry and manufacturing represent only a small part of the economy, but economists consult these measures because they have historically been sensitive to changes in the overall economy.
The Industrial Production Index, which measures the value of items produced in the United States, shows growth far above that of previous recessions.
On the other hand, the inflation-adjusted value of items sold in the United States, measured by real manufacturing and trade sales, has dropped, resembling the patterns of previous recessions. That may be because of how the pandemic reshaped consumer spending: goods spending is starting to cool from its pandemic-fueled frenzy, and service spending has finally risen back to its pre-pandemic levels.
We won’t know for a while whether we are in a recession and, if so, when it began. But the measures that matter to decision-makers at NBER suggest a different and more complicated picture than previous recessions.
If we are in a recession or enter one soon, it may be unlike the most recent economic downturns we’ve faced.
“All of our thinking is based on the last 20 years of recessions,” said Thomas Coleman, an economist at the University of Chicago. “I’m not sure that’s a good guide.”
The Great Recession and the 2020 recession were both tipped off by crises: a financial meltdown and a pandemic suddenly shutting down the economy.
Without a crisis on a similar scale, Coleman says, the next recession will be more like those from the 1970s to the early 2000s, causing significant pain but not repeating the devastating job losses of the past two recessions.
“The question we need to ask,” said Coleman via email, “is ‘do we feel unlucky?’ ”
Demand for Aluminum Slows in Another Sign of Troubled Economy – Bloomberg
4 experts explain how to prepare for a new economic reality and protect the most vulnerable – World Economic Forum
- Chief Economists are mostly in agreement that the outlook for the economy is bleak and that recession is likely.
- This new reality will take its toll on inequality and widening societal gaps.
- Four experts explain how policies might address the immediate crisis with an eye to beefing up resilience in the long term.
The latest World Economic Forum Chief Economists Outlook suggests a global recession is “somewhat likely” and the fallout will take its toll on inequality. Just this week, the OECD put out a similar message in its interim report, warning that recent indicators have “taken a turn for the worse”.
Chief Economists have been nearly unanimous in predicting wages to fail to keep pace with surging prices, with nine in ten expecting real wages to decline in low-income economies in 2022 and 2023, alongside 80% in high-income economies.
This will see a continuing deterioration of household purchasing power compounded by aggregate pressures on basic necessities such as food and energy.
Saadia Zahidi, Managing Director at the World Economic Forum highlights “Growing inequality between and within countries” as the “ongoing legacy of COVID-19, war and uncoordinated policy action.” She says, “With inflation soaring and real wages falling, the global cost-of-living crisis is hitting the most vulnerable hardest. As policy-makers aim to control inflation while minimizing the impact on growth, they will need to ensure specific support to those who need it most.”
We asked four chief economists who took part in the survey which policies they think will protect the most vulnerable and how this new economic reality might be steered to better prepare for the future.
‘Pricing carbon (globally) must play a central role’
Christian Keller, Head, Economics Research, Barclays
The one change I would make to the global economy to better prepare us for the future would be to implement a global carbon pricing mechanism. The earth’s climate is the ultimate ‘tragedy of the global commons’: individual and collective incentives are misaligned, because the price of harmful economic activities does not accurately reflect the true social cost. It results in the over-production of carbon-intensive assets to the ultimate detriment of global welfare.
Pricing carbon emissions – or the internalization of their negative externality – is the first step to solve this ‘market failure’. Increasing their price, dis-incentivizes carbon emissions, while also generating public revenues to compensate groups negatively affected by the transition and/or fund public goods such as low-carbon energy infrastructure.
Such a carbon pricing mechanism would ideally be global in nature, to avoid regulatory arbitrage and cross-border carbon leakage.The principles of such a mechanism are textbook economics, but many more questions arise in practice, including how to determine the true ‘marginal external costs’. Naturally, it would be a discovery process and there would be glitches. However, if one does believe climate change is a threat and that it is caused by carbon emissions, pricing carbon (globally) must play a central role.
‘Build a resilient and sustainable pricing strategy’
Gregory Daco, Chief Economist, EY-Parthenon, USA
The various drivers of economic activity that were previously taken as a given will now warrant much more attention from businesses, investors and consumers. There will be five central tenets to this new paradigm: inflation, labour, supply chain, the cost of capital, and environmental, social and governance (ESG) and sustainability issues.
While the current focus is that inflation is hovering at multi-decade highs in many places around the world, there doesn’t appear to be a broad realization that inflation persistence and volatility are likely to be a key feature of the outlook over the next few years. As such, businesses will need to consider building a resilient and sustainable pricing strategy that is nimble enough to navigate a world where demand will ebb and flow more significantly than in the past few decades. Cost management and productivity gains will likely also have to be central to companies’ holistic inflation strategy.
In an environment, where talent is not just more expensive but is also perceived as more valuable and where pricing power will be limited by softening final demand, business executives will increasingly have to focus on productivity and efficiency gains to offset higher labor costs. This won’t be easy, but it will be central to their success.
Supply chain issues have been a central part of the inflation story of the last few years, and it would be misguided to believe that these issues will dissipate overnight. Businesses will need to build supply chain resilience while being aware of economic, geopolitical and political undercurrents.
The rise in the cost of debt has led business executives to put some investment plans on hold, while the large fluctuations in equity valuations have created a wedge between buyers’ and sellers’ perception of the true value of an asset. In addition, the significant US dollar appreciation against most other currencies has created a new set of considerations for multinationals having to hedge their international exposure and incorporate a new consideration into their organizational and portfolio decisions.
Over the last few years, businesses have increasingly focused on ESG and sustainability issues to create long-term value, develop a sense of purpose, and provide trust and confidence to the market. The last few months have brought about a sense of urgency to these developments.
‘Address structural factors to reduce future vulnerabilities ’
Eric Parrado, Chief Economist; General Manager, Research Department, Inter-American Development Bank
The global inflationary crisis is having profound consequences on the well-being of populations around the world, especially in emerging and developing economies. Estimates for Latin America and the Caribbean suggest that food inflation could increase poverty rates by 1.6 percentage points and extreme poverty by 1.8 percentage points.
Policies should have a short term and long-term focus. In the short-term governments should provide transfers for the poorest populations to compensate increases in food prices. This helps to keep people from sliding into poverty and extreme poverty. Subsidies should be designed and funded carefully to avoid larger fiscal imbalances that could contribute to higher inflation rates.
Long-term policies address structural factors to reduce future vulnerabilities. Investing in agricultural innovation, research and climate change adaptation are key to improving productivity in agro-industries, food system resilience and strengthening food security in the long run.
A greater focus should be placed in climate change mitigating policies to ensure agricultural frontiers are not displaced further, and food supply is not restricted. At the same time, countries can avoid directing scarce fiscal resources to cover the costs of dealing with costly man produced natural disasters.
‘Drive employment opportunity and protection’
Svenja Gudell, Chief Economist, Indeed
Access to good jobs is an integral part of both obtaining and sustaining quality of life and well-being. From a labour market perspective, policies which could dramatically benefit vulnerable populations include: skills-based hiring, pay and wage transparency, second chance hiring, accessibility tools and accommodations, and inclusive and unbiased hiring – to name a few. While some leaders look to a one-size-fits-all policy to address cost of living issues, the truth is this rarely results in the desired outcome. Instead, policymakers must consider both the broader, long-term picture, as well as the unique situation within industries, locations, and individual needs to help close these gaps.
As we face hardships ranging from increased cost of living, global warming, geopolitical tensions, etc., employment opportunity and protection for all is key to future prosperity. The micro and macro benefits of adequate, gainful employment enable an increased quality of life and well-being, opportunity for economic mobility, and benefits to both physical and mental health. Ultimately, on a global scale, we must identify and build on technology that is being used effectively to support workers and ensure that job mobility, continuous learning and access to information are widely available to drive employment opportunities and protection for workers.
What next for the global economy? 3 experts have their say – World Economic Forum
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The views expressed in this article are those of the author alone and not the World Economic Forum.
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