Despite a contracting economy and risk of debt deflation, it’s not a recession. Say what?
One of the most famous images of the Iraq War in 2003 was when Mohammed Saeed al-Sahhaf, the Iraqi Media and Foreign Affairs Minister, was interviewed for television and declared that there were, “no American troops on the streets of Baghdad,” just as American tanks rolled through in the background of the screen. This cemented his nickname of Comical Ali.
I thought of such cognitive dissonance today as it becomes clear that a U.S. recession will not be officially declared. Yesterday, the preliminary measurement of Gross Domestic Product (GDP) in the U.S. was released for the second quarter of 2022. Coming at minus 0.9%, it is the second consecutive quarter of contraction after the minus 1.6% during the first three months of the year. For most countries in the world, two consecutive quarters of contracting GDP constitute an economic recession. The U.S., though, does things differently.
Surprisingly, for such a country which prides itself on its dynamism and lack of bureaucracy, the decision of whether the economy is in a recession is made by a secretive committee! A team of egghead academics and former government economic advisers look at a broad range of data before eventually proclaiming a recession or not. Without wanting to send you to sleep with the details, one of the key aspects they look at is Gross Domestic Income (GDI). As opposed to GDP (the economic value of everything produced), GDI measures the money earned for everything produced. I know, I know. Semantics. Normally GDP and GDI are similar but there can be periods of discrepancy, such as now. Whatever the reasons, the committee will eventually decide whether the economy is contracting. Sometimes that decision can take more than a year!
Meanwhile, back on planet earth, the prospect of an ongoing economic contraction and possibly debt deflation continues to grow. Data from the U.S. housing market increasingly points to a growing crisis and the steady rise in jobless claims is a sign that the labor market is weakening.
America is the engine of the global economy, and it is spluttering. Since at least 1949, every time there has been two consecutive quarters of contracting GDP a recession has been declared. This time could be different, but we don’t think so.