Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
U.S. 2Q GDP growth: Are we in a recession?
Christopher Dembik
Head of Macro Analysis
Summary: What is a recession ? This looks like an easy question. Most investors and analysts would answer that two consecutive quarters of negative GDP growth is the common rule-of-thumb definition of a recession. This is not quite that. That’s why even if today’s U.S. 2Q GDP growth is in contraction territory (after a negative print in 1Q at minus 1.4 %), this does not necessarily mean the United States is in a technical recession.
The U.S. Biden administration has prepared the ground for a negative U.S. 2Q GDP print. On 24 July, U.S. Treasury Janet Yellen confirmed GDP growth could be disappointing in 2Q. She is expected to host an (unusual) press conference later today after the GDP report. In a rather unusual move, the White House published a blog article entitled “How Do Economists Determine Whether the Economy Is in a Recession?", on 21 July.
The common rule-of-thumb definition in most countries is two consecutive quarters of negative GDP growth. In 1Q, U.S. GDP growth contracted by minus 1.4 % - see Chart 1. Based on the latest statistics (such as the housing market data with a drop of 30 % of new homes sales since December 2021 and 8.1 % only for the month of June), risks are tilted to the upside that growth will contract in 2Q too. This would mean that the United States is in a technical recession. However, this is not that straightforward. The official definition of a recession in the United States differs from other countries. The National Bureau of Economic Research (NBER), an independent body founded in 1920, is the official recession scorekeeper. It defines a recession as a “significant decline in economic activity that is spread across the economy and that lasts more than a few months”. Several variables are taken into consideration, such as: employment (both establishment and household survey), real consumer spending, real manufacturing and trade sales, industrial production and real personal income (excluding government transfers like unemployment insurance). Surprisingly, the NBER does not base much of its decisions on GDP. It is taken into account. But it plays a little role in assessing the reality of a recession. This is for good reasons. GDP is released only quarterly. It is subject to major revisions years after its first release. It can be skewed by a couple of sectors too. The issue of revisions is actually pertinent now. Many economists believe that U.S. 1Q GDP will be revised in positive territory ultimately (this makes sense based on gross domestic income data – which can be considered as an income-side estimate while GDP is a production-side estimate). Expect that private domestic final demand (which represents consumption + business fixed investment + residential) to be revised upward especially. This is our preferred metric at Saxo Bank since it is more correlated to future GDP growth. If this happens, the “two negative quarters” threshold (which matters so much for market participants) will certainly not be met.
However, based on the indicators the NBER pays most attention (see the list below), we can all agree the United States is certainly not in a recession now. All of them are either still rising or have flatlined. But there is no significant decline. If we look at more real-time indicators (NBER’s indicators are mostly backward-looking), the economy still looks in a fine shape, though decelerating. The state of the labor market is not consistent with an economy in recession, especially. In June, the United States had recovered 98 % of jobs lost during the pandemic, and all private sector jobs lost at the start of the outbreak have been recovered. Unemployment has remained at its historic lows in 2022. Unemployment claims are up a bit. But this can be partially explained by seasonal noise. Job openings are slightly down. But they are still very high. There are cracks in the foundation of recovery forming, of course. No one can deny it (see our analysis about the U.S. housing market risks, Housing IS the business cycle, 23 June). There is also a lot of data noise due to the pandemic effect, which makes it harder than usual to read the economy too. However, these are not the signs of a recessionary economy, in our view. Therefore, we should certainly avoid over-interpreting today’s figures too much. They are volatile and highly subject to revision.
Let’s first ask the easy question: What is a recession?
The common rule-of-thumb definition in most countries is two consecutive quarters of negative GDP growth. In 1Q, U.S. GDP growth contracted by minus 1.4 % - see Chart 1. Based on the latest statistics (such as the housing market data with a drop of 30 % of new homes sales since December 2021 and 8.1 % only for the month of June), risks are tilted to the upside that growth will contract in 2Q too. This would mean that the United States is in a technical recession. However, this is not that straightforward. The official definition of a recession in the United States differs from other countries. The National Bureau of Economic Research (NBER), an independent body founded in 1920, is the official recession scorekeeper. It defines a recession as a “significant decline in economic activity that is spread across the economy and that lasts more than a few months”. Several variables are taken into consideration, such as: employment (both establishment and household survey), real consumer spending, real manufacturing and trade sales, industrial production and real personal income (excluding government transfers like unemployment insurance). Surprisingly, the NBER does not base much of its decisions on GDP. It is taken into account. But it plays a little role in assessing the reality of a recession. This is for good reasons. GDP is released only quarterly. It is subject to major revisions years after its first release. It can be skewed by a couple of sectors too. The issue of revisions is actually pertinent now. Many economists believe that U.S. 1Q GDP will be revised in positive territory ultimately (this makes sense based on gross domestic income data – which can be considered as an income-side estimate while GDP is a production-side estimate). Expect that private domestic final demand (which represents consumption + business fixed investment + residential) to be revised upward especially. This is our preferred metric at Saxo Bank since it is more correlated to future GDP growth. If this happens, the “two negative quarters” threshold (which matters so much for market participants) will certainly not be met.
Now, let’s ask a second question: Are we in a recession?
Short answer: probably not judging by the main indicators the NBER and economists look at.
This does not mean that the United States will exit this cycle without going through a recession or a recessionette (term coined by the U.S. economist Diane Swonk to define a healthy contraction in GDP growth which brings down inflation). This will depend on several factors we cannot fully assess now, such as the speed of monetary policy tightening and its impact on the overall economy or the effect of the ongoing Chinese stimulus on the global economy. There is still a lot of uncertainty and lags which make it difficult to forecast the pace of the economy in the near future.However, based on the indicators the NBER pays most attention (see the list below), we can all agree the United States is certainly not in a recession now. All of them are either still rising or have flatlined. But there is no significant decline. If we look at more real-time indicators (NBER’s indicators are mostly backward-looking), the economy still looks in a fine shape, though decelerating. The state of the labor market is not consistent with an economy in recession, especially. In June, the United States had recovered 98 % of jobs lost during the pandemic, and all private sector jobs lost at the start of the outbreak have been recovered. Unemployment has remained at its historic lows in 2022. Unemployment claims are up a bit. But this can be partially explained by seasonal noise. Job openings are slightly down. But they are still very high. There are cracks in the foundation of recovery forming, of course. No one can deny it (see our analysis about the U.S. housing market risks, Housing IS the business cycle, 23 June). There is also a lot of data noise due to the pandemic effect, which makes it harder than usual to read the economy too. However, these are not the signs of a recessionary economy, in our view. Therefore, we should certainly avoid over-interpreting today’s figures too much. They are volatile and highly subject to revision.
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