Recession Redefined

August 03, 2022 | James Torgerson, Research Analyst

Combination column and line chart showing U.S. GDP Growth, year over year, and Personal Consumer Expenditures (PCE) contribution to GDP. Chart subtitle: In only the mildest recession over the last 50 years did PCE not turn negative. Chart visual description: Y-axis spans percentages from -15% to +15%. X-axis shows dates from 1Q1970 to 1Q2021, though data is through 2Q2022. Recessionary periods are shaded in light grey, with 8 marked in the time period shown. Green columns display Real GDP YoY. Teal line displays PCE Contribution to GDP. A note on the chart notes that data during 2020 exceeds the bounds of the chart area, as the PCE line went negative to -24.1% in 2Q20, and positive to +25.5% in 3Q20. Chart data description: As explained in the text, one common definition of a recession is at least two consecutive quarters of negative GDP growth, and the GDP columns coincide with each recessionary period, going negative a two quarters before a recession, then going positive, then fully falling within the recession shading. The first two quarters of 2022 both had negative GDP YoY. The PCE line also corresponds to the text’s explanation. Though the recent quarters have seen a slight decrease, PCE is still positive as of now. Historically, however, it has turned negative preceding recessions, except for 1991’s. Chart Source: U.S. Bureau of Economic Analysis as of June 30, 2022.

The National Bureau of Economic Research (NBER) is widely considered the official judge on what is and is not a recession. The academic organization’s traditional definition of a recession is a “significant decline in economic activity that is spread across the economy and lasts more than a few months.” This definition can be subjective and, to help avoid the need for revisions, the committee does not typically call the start of a recession, or the end of a recession, until well after the fact.

Another commonly accepted definition of a recession is at least two consecutive quarters of negative GDP growth. Given the last two GDP prints of -1.6% in the first quarter and the advance estimate of -0.9% in the second quarter, the U.S. economy would be in a technical recession. Recently, both the White House and Federal Reserve Chairman Jerome Powell have argued that this interpretation does not accurately reflect the current state of our economy, specifically given the still-strong labor market.

Another economic indicator to consider is consumer spending, specifically the contribution to GDP from Personal Consumption Expenditures (PCE). Consumer spending comprises 70% of GDP and is traditionally a much less volatile component than investment and net exports, the primary contributors to the year-over-year declines in the first half of the year. The strength of the U.S. consumer will dictate the country’s path from here, as healthy balance sheets and a hot labor market contend with decades-high inflation and rising rates. PCE contributed a positive 1.2% and 0.7% to first and second quarter GDP, respectively. In only one of the last eight recessions over the last 50 years — the relatively mild downturn in 2001 — has PCE not turned negative. One month into the third quarter, the highly-regarded Atlanta Fed GDPNow tracker is projecting positive PCE and overall GDP growth for the quarter. The current macro situation is complex, with a healthy U.S. consumer facing a number of headwinds, and, in this case, understanding those underlying dynamics is just as important as the “are we or aren’t we” debate.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

James Torgerson
Research Analyst

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