Using an old rule of thumb, the U.S. arguably fell into a recession earlier this year. Yet updated growth figures could show the economy was not as weak as it looked.
How so? The government on Thursday will post new estimates of gross domestic product for the past five years, a process it performs annually. GDP is the official scorecard of sorts for the economy.
As part of the GDP fine-tuning, the negative readings for the first half of the year will be revisited. Officially, the economy shrank at a 1.6% annual pace in the first quarter and 0.9% in the second quarter.
It’s quite possible one of the quarters could be revised to show positive growth, potentially putting to rest a smoldering debate over whether the economy has already sunk into recession. The debate has been particularly fierce among political partisans.
A dictionary definition defines a recession as two quarters of declining GDP. Yet other measures such as strong hiring and record-low layoffs suggest the U.S. economy posted modest if slower growth earlier this year.
That’s why the group responsible for declaring U.S. recessions has held off from doing so. The National Bureau of Economic Research takes a variety of factors into consideration, and even when it does declare recession, it usually does so well after the fact.
The mystery of negative GDP doesn’t end there.
The GDP reports also show a weird gap between income and spending that hint at major flaws in how the government has been adding up the numbers. The pandemic has wreaked havoc on the process for seasonal adjustments.
What the government calls gross domestic income — mostly wages and profits — actually rose at a decent 1.7% annual clip in the first quarter and 1.3% in the second quarter.
“The statistical discrepancy between the two has been at record highs, with real GDI presenting a much more resilient picture of economic growth,” economists at Deutsche Bank wrote in recent report.
Think of GDP and GDI as two sides of the same coin. Over time they tend to merge and paint a similar picture of the economy. But they aren’t doing so now — and one of the two has to give.
The bet among economists is that it will GDP.
Yet even if the revised GDP figures remain negative, the third quarter is likely to show the economy resumed expansion again. Most forecasters predict an increase of 1% or more.
How come? The same forces that dragged down GDP in the first half of the year — record international trade deficits and weak inventory growth — have reversed course. They are now likely to add to U.S. growth.
Does it even matter now? The entire debate is likely to prove academic, economists say.
The Federal Reserve is jacking up U.S. interest rates and is dead set on slowing the economy, a strategy aimed at bringing down the highest inflation in 40 years. Many analysts predict the Fed’s actions will lead to a recession by next year.
“We’re talking about a revised look in the rearview mirror while the road ahead for real GDP is looking rockier and more uncertain seemingly by the week,” said chief economist Richard Moody of Regions Financial.