Plain English with Derek Thompson - Why the Question "Are We in a Recession?" Is Impossible to Answer

Episode Date: July 29, 2022

On Thursday, the Bureau of Economic Analysis announced that GDP dropped for the second consecutive quarter, fueling fears that the economy is in a recession. Today's guest is Austan Goolsbee, a professor of economics at the University of Chicago Booth School of Business and the former chair of the Council of Economic Advisers under President Obama. In today’s episode, we talk about the most important details from the GDP report, investigate the curious case of America’s plummeting productivity, and talk about why the question "Are we in a recession?" is so annoyingly hard to answer.If you have questions, observations, or ideas for future episodes, email us at [e-mail]. You can find us on TikTok at www.tiktok.com/@plainenglish_ Host: Derek Thompson Guest: Austan Goolsbee Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

What's up, everybody? Are you tuning in to the Challenge USA on CBS? Well, tune in to me, Tyson Apostle, as I break down each and every episode with my co-host, Amelia Weddemeier. I'm also a contestant on the show, which gives you all the insider scoop. Amelia, how stoked are you to do this? Tyson, I'm freaking excited. I cannot wait to sit my butt down every single week to watch the show, then come here and recap it with you on the Ringer Reality TV podcast. Today, the weirdest account, ever takes a new weird turn, plus a huge week for economic news. We'll start with the huge week. By my count, there were five big economic stories that would otherwise define a normal week, and they all have happened in the last, like, 72 hours.

Number one, the Federal Reserve announced its decision to raise a key interest rate by 0.75 percentage points. Again, this is a huge move to destroy aggregate demand and bring down inflation. Number two, the House and Senate approved the Chips and Science Act, which injects billions of dollars into the domestic semiconductor manufacturing industry and also funds a great new deal of scientific research. That's very cool. On Wednesday, number three, Senator Joe Manchin shocked pretty much everybody, journalists, his colleagues, by agreeing to back a landmark climate and infrastructure bill. An episode explaining that bill is right around the corner. Number four, the Biden administration adopted a plan to stabilize oil prices. It is very, very close to the plan that we discussed just a few weeks ago with Skanda Amarnath.

Always nice when Plain English leads public policy by a month and a half. And number five, the Big Kahuna, GDP fell again. The Bureau of Economic Analysis announced on Thursday that the economy declined for a second consecutive quarter. That is the popular definition of a recession. But as we'll discuss in just a few seconds, it is not the actual definition of a recession. Still, there's just no sugarcoding what is going on right now. This report is bad. GDP failed by an annualized rate of negative 0.9%.

This story behind why is pretty simple. Inflation is eating personal income growth. Inflation is eating the economy. and the Fed's interest rates are eating the housing market and other loan heavy sectors. Interest rates go up, housing market contracts. And with all this bad news, the stock market went up because, of course, it did. Stocks don't make sense. That's their job.

So to discuss everything that is making and not making sense, the GDP report, the big R-word, today's guest is Austin Goulsby. Austin is a professor of economics at the University of Chicago Booth School of Business. He is the former chair of the Council of Economic Advisors under President Obama. And in today's episode, we talk about the most important details from the GDP report. We investigate the curious case of America's plummeting productivity. And we talk about why the question, are we in a recession, is so annoyingly impossible to answer. I'm Derek Thompson.

This is plain English. Austin Gulesby, welcome to the podcast. Hey, Derek. Great to talk to you again. We are talking on Thursday morning. The GDP report is just out. I have my own read on this report, but I am not an economist. I don't teach economics.

I've never shared the Council of Economic Advisors for a sitting president. You are on the other end of my non-accomplishments. So I'd first like to know how you read the report. What jumped out to you? Well, I mean, the obvious thing is, we got a second quarter of negative GDP growth. It's tremendously hard to reconcile the GDP going down while the job market is booming like crazy,

three, four hundred thousand jobs a month. And I guess the second thing that jumps out at me is for all the discussion in 2021 about stimulus, it's worth remembering everything is compared to last year. So in 2021, it was like a plus $2 trillion from fiscal stimulus, but that means it becomes minus $2 trillion in 2022. And you kind of see this in the data that fiscal drag, I think, is pulling down growth. There are a couple of things that I saw in this report that I want to get your brain on.

One is that residential investment absolutely crashed last quarter. It fell by 14% annualized. That's a huge, huge number. And at the risk of sounding like an idiot, it's so big that I almost can't believe it. In plain human language, what does it mean that residential investment declined last quarter by 14% annualized? What does it say about what's happening in the housing market right now? Well, I mean, it says the part that's not surprising about that is it's

says people care about the interest rate when they go get a mortgage on a multi-hundred-thousand-dollar purchase. That's known. We absolutely know that. And usually that is one of the main vehicles that the Fed uses to cool demand, that they raise the interest rate knowing that it will chill construction and that it will chill people going out to buy houses. And it will slow purchases of autos and consumer durables and stuff that's interest rate sensitive. That's literally the only tool that the Fed has is they can dial up or dial down demand on interest rate sensitive things. I think it's precisely this bizarro universe downturn in 2020 that in which a bunch of cyclically sensitive things went up so people bought more housing, more cars, and more TVs and Durbel goods,

because there was nothing else to spend their money on. That's made this totally weird. That makes this totally weird. And so the Fed is raising rates faster than it has in decades, if not ever. And when the interest rate goes up that fast, like one and a half, two full percent, percentage points in a matter of months, of course the housing market collapses because people care a lot about that. The second thing about this GDP report that struck me is that we're still living in a supply-shocked

world. Like energy and energy inflation was a huge drag on real growth last quarter. That's basically Russia. That's just a result of Russia invading Ukraine, gunking up energy markets. But then there's this second thing that I've been focused on recently, which is China. that China shut down a lot of major cities in the last quarter to deal with the spread of COVID. And that has really affected global supply chains that run through these major Chinese cities. So keeping those two things in mind, how would you describe the supply side challenges the U.S.

economy is facing right now? Both of those are true. I think both of those are true. And both of those are kind of like your grandpa's supply shock. They're totally understandable. and like your grandpa, you know, remembers the oil embargo of 1972 or whatever. But I think the thing that's different here, there was a supply shock unlike any other that we've seen, which was there was a major negative supply shock to the supply of labor to the service sector

that came from COVID. And that... You're saying people just literally couldn't go to work in restaurants. When the restaurant was shut down. Refused to go to work. They got sick. They're taking care of somebody who's sick. They don't want to get infected when they're at work.

That shift back of labor supply to services was a supply shock and an important one and generated some weirdness that has led to the confusions that we see. Like if you have a supply shock to labor in service. and that means a bunch of people shift to buying more physical goods, that's going to look like an overloading of the ports in Los Angeles. But the overloading of the ports in Los Angeles itself is not a supply shock as kind of the critics of the supply shock. They look and they're like, but they're at record levels of output. So that's just an overload. That's not a supply check. That's just an overload. They are right. That's just an overload.

But I think this big supply shock to labor in the service sector, plus supply shock to oil prices, plus chip factory shutting down, China shutting down suppliers. Those are three different supply shocks, and they've all kind of landed on top of each other or gone sequentially. And I do think that some of those are partly why you didn't see inflation come down when they thought it was going to. This is really helpful to me in terms of putting together a couple ideas that have been floating around in my head. Because, you know, I think you're absolutely right that the COVID shock to labor supply in services has had a bunch of very strange outcomes. So just looking at something like Delta firing a third of its staff in 2020. So what does that do sort of when you think about that across the economy?

Because Delta is doing it, but so, you know, restaurants are doing the same thing. Hotels are doing the same thing. Okay, that's going to do a couple things. Number one, unemployment is going to go up, obviously. Number two, people can't fly or go to hotels anymore because of COVID, so they're going to shift their spending toward durable goods like furniture and electronics and whatever. you know, stoves. What that does is it gunks up international supply chains around durable goods because now

we're demanding more stuff to be pulled through ports than the ports can actually service so it creates inflation in durables. But then what it also does is it creates an annualized decline in durable goods as services come back online. Suddenly we decide we don't want shirts anymore. We don't want the furniture anymore. We don't want all that stuff that we were telling the Walmarts and targets of the world a year ago that we wanted. So now there's an inventory overhang at the Walmart and targets,

and at places like Delta, what are you seeing? You're seeing chaos because they had to hire back all these people very suddenly, but they're hiring them back and not being able to train them fast enough. So you're seeing all sorts of service sector weirdness, whether it's, you know, like, for example, people, lots of cancellations in flights and lots of delays because these problems are cascading through this system. So it's just interesting to think that like the original sin, like the the first domino to fall here is this supply shock to labor in services. And so much of this weirdness is just still emanating from it. Now, obviously, that's an oversimplification. And there were demand things going on and there were policy decisions going

on. But I still think that labor supply impact of COVID, that's the central thing of what happened. The third thing I want to point out, returning to the GDP report, is that even as we heard girding up to talk about the big R word here, I want to say the Bureau of Economic Analysis, which publishes these GDP estimates, is publishing estimates and estimates are revised. In fact, there's about a 50-50 chance, a coins flip that with future revisions, we could learn that the first or second quarter of GDP was actually positive. How should we think about that? Yeah, look, you're right to highlight that. Now you're joining, you've become one of us, and you know, you're joining us down in the weeds of how they add up the data and what things they

measure. These things can matter. A lot of times people will say, well, why don't they just go measure it? I mean, like, why do they have to revise it? And the answer is there are a bunch of things that they don't get in time. So they just kind of project forward based on past relationships. Like, well, how much trade was there? Well, you know, they'll observe certain things and they'll say for the last 50 years, whenever we saw this, you know, about 20% of that will end up being exports. So we're going to put in a placeholder of 20% of this thing we observed. And then over the following months, you know, they revise it for up the two years. Sometimes the revisions are not small.

You know, I remember back in the great financial crisis and then the Great Recession, the first estimate for the fourth quarter of 2008 was minus three and a half percent GDP, which pretty dramatic negative. That was revised to minus nine percent. So, I mean, it went from like, ooh, that's a bad recession to like that. That's one of the worst quarters we've ever measured. So we don't know what the revision will be just to not to get into. the, not to weigh into this argument about the, is that a recession or not a recession?

Why? We're going to wait into that argument, no matter. I mean, whether or not you want to get into it, we are waiting into it. Well, so, yeah, I mean, let me just put it to you this way. Look, like, I kind of want to present to you the question, are we in a recession, like, for analysis rather than actually ask you. Like, if you want to make a prediction, you can make a prediction. If you want to tell me, it's an unanswerable question at the moment and that I should

feel bad about even asking you to try to answer a question like this. that's on the table too. But how do you as an economist think about the question, are we in a recession right now? Because I have a pretty strongly felt, a pretty strongly held answer to this, but I'd love you to go first. Let me give you two segments of an answer.

One is about philosophy and one is about the practical, is this a recession? By the way, is this what you would do when Obama would ask you questions about, like, are we in a recession? I'm going to give you two answers. First, the philosophical answer.

We have more time on the podcast than typical. But look, the philosophy is, I say this, you're going to think it's a joke. This is not a joke. Economists, forget about forecasting the future. Economists argue vehemently about forecasting the past and things that already happen. And we're terrible at not just predicting recessions, figuring out if you're in a recession. Okay. So if you go back to 2001, it was a short-lived recession.

And in the Wall Street Journal survey, we were halfway through the recession. And only 26% of economists thought there would be a recession there. year. Okay, but it had already been going and was going to, it was still going to come to conclusion. And that's because the data come in with a lag and the normal definition of recession hinges on, it's done by a commission, you know, and who are the, who are these counsel of, you know, the Supreme Court of Recession Determination. They're a bunch of very distinguished macroeconomists, some Democrats, some Republicans, some you don't even know what party they are.

And they've seen a whole lot of downturns. And so they look back. And they only look back with a lag. So we won't know the official answer for months, that they'll come back and say, ah, here's what it was. Now that we have all the data in, we can see whether there was a broad base downturn. So they tend to look at a collection of things, not just one thing. GDP growth is one, real income, employment, industrial production, a series of things that they look at because recessions aren't secret. They're not like, oh, was it, I need to look

through the, at this angle to see it. It's, is there a broad-based decline of economic activity? But it's very hard to know that in real time. And you can easily have recessions that you didn't, you didn't realize in the moment. And can you just explain why the popular definition of two consecutive quarters of negative GDP growth isn't the actual definition of a recession? The reason they don't, economists don't use this kind of, crude rule of thumb of two consecutive quarters of negative GDP growth is if you just go back and look at recessions, you would muff it. You would miss the timing of several of them.

And take the 2020 downturn. The entire thing lasted only two months. The recession was only two months. So anything that's like, let's take six straight months of negative GDP growth, it's not going to work. That doesn't work. If you go back to the 70s, we had a recession that started, and I believe the recession ended, and then we had two quarters of negative GDP growth at the tail end or maybe even after the recession was over. So that's a rule of thumb, which usually works, because recessions are. are broad-based declines in economic activity. So if you see two quarters of negative growth, it's usually correlated with a broad-based decline. But it doesn't always work. And that philosophy

leads into the right now, I don't think that for the first two quarters of 2022, that you should call that a recession, because we had blockbuster employment growth. Really unbelievable, The unemployment rates already 3.6% and we were putting up almost 400,000 jobs a month. That's not a recession. I mean, that's like an unprecedented boom of employment. We've never had a recession where employment was booming. Employment goes down in recessions. So I don't think that they're going to look back on the first six months, barring some massive

revisions to employment. I don't think they're going to call that a recession. The way that I think about this now, and my thoughts have changed a lot in the last few months, is that there's a really important distinction between the numbers and the nomenclature. And one analogy that occurs to me is, I don't know, are you a football fan? Yes. You know how there's this debate about quarterbacks of, are they elite, right? Like, is Joe Burrow elite, right? is Joe Blacko elite was the huge question they were asking after his

after Super Bowl win. So imagine if there was- Bears have not had a, any, anybody that we've had to ask this question about for a long time. So imagine if there was like an NBER, like business cycle committee, but for evaluating the eliteness of professional quarterbacks, right?

Yes, that's what this is. But they only decided like two years later. Like you only know if Joe Burrow was an elite quarterback in 2021 and 2023. Yeah. And it's like, well, wait, the numbers are still the numbers. Like, it's not a matter of debate of whether or not, like, Joe Burrow threw for whatever it was, 4,000 yards, 34 touchdowns, and made the Super Bowl. Like, that's a fact.

Whether or not he's elite is a determination made by eight very smart people one or two years later. Of course. Of course. So what difference does it make if you called it that? There's an old story, the Great Blues record label, chess records was here. Chicago. And the great blues man, Sunny Boy Williamson, sang a song that ends up becoming a classic, and Mr. Chess walks in and says, that was an amazing song. We got to release it. What's the name? What's the title? And he says, I don't know. And it doesn't have a title. He goes,

no, no, it has to have a title. What's a title? He says, it doesn't have one. And Chess insists, no, he says, call it whatever you want. Call it your mama. I don't care. You know, and And that's the GDPs down. Employment is up. Those are the facts. So what do you want to call that? It's funny. I have like exactly this right here in my notes.

It's like the numbers are the numbers. Like yes, there will be revisions. But here's what we know for pretty much certain. The labor market has been really strong for the last six months. We just know that. Inflation is really high. We just know that. Growth is slowing down.

We just know that. Like all those things are true. no matter what we call it. I understand the cable news necessity to have a terminology to fight about. I understand the political necessity to have a term to fight about. I even understand the economic historian case for having a term that we need to distinguish, you know, what is the difference between 2006 and 2008? Like, there's a big difference between a growing economy declining. You know what's the best part about this? If you're an academic, you never get to tell somebody like, ah, you're being naive.

You know, because that's what they tell you all the time. But Derek, now I get to say to you, how quaint? You're being so naive. You know, your inner academic is coming out here. Everything you said is absolutely spot on. And yet, we are going to be arguing about. this for months. Oh, we're arguing about it right now. Right. I brought you on to have an argument. Exactly. Exactly. And in a way, I think this is just the politicization of everything has gotten to the

economic data. And it's not brand new that that would happen. But the usefulness of things like consumer confidence for predicting consumer spending have largely broken down because many measures have just turned into who did you vote for? And so literally, they've been studies where they go look at consumer confidence. And it's like on the night of the election, if you're a Democrat and you find out Joe Biden won, your opinion of the, how has the economy done this past year? suddenly changes. They're like, oh, the economy's doing great. And all that happened was, you know, there was an election. And, you know, maybe there's no way around that. As the kids these days say,

it's all vibes, right? That's the, that's the modern way to frame it's saying. But this thing about the vibes, not comporting with the numbers necessarily, that's not new. That's happened a lot of times. And partly I'm scarred by a my own personal experience is, like, in 2009, Barack Obama passed a stimulus, which cut taxes for 98% of America and left taxes the same for the top 2% of incomeers. It was a huge tax cut, and in the run-up to the 2010 midterm, you had like 60-something percent of people saying they agreed with Republicans that Obama's tax increases were what was making. the recovery slow. And it was like there weren't any taxic raises. There were none.

Like what? But the vibes, you know, that was what the vibe people had. And if you're not old enough to remember the fight of the 1992 presidential election, anybody who was, remembers, the entire election was about the recession and that George Bush was mishandling the recession and he couldn't feel your pain and Bill Clinton was more in tune with regular people. Go back and look at the numbers. There was no recession in 1992. The recession ended in 1991. 1992 was a perfectly good year, but the vibes were all about recession. And I wonder if we're going to get into a thing like that where in a way all that matters is the vibes and the discussion and the if you're, You are going through the numbers, you know, there you are going through the details of the GDP report.

You're like, ah, I see residential construction, had a record downturn. What does that mean for investment for the year? Is it going to matter? I don't know if it's going to matter. Yeah, you better watch your back because your named professorship at Chicago booth is going to be soon taken over by an upstart economist of Vibonomics, I think, one of these days, because that is the future. My chair is actually named for the guy who was the head of the Encyclopedia Britannica. And I love that. Speaking of terminology, that's who he was.

I know that some moderator conservative listeners are going to say, you know, you guys are just saying that the terminology for recession doesn't matter because it's a Democrat in the White House. And I just want to make it clear that I think we're both in the exact same page here that like there are aspects of this economy that are like objectively bad. Like 9.1% inflation is like objectively not good. slow down in GDP is obvious. Like this, these things are happening. What we're saying is that you can sort of think about three different categories, it seems. Number one, there's what's actually happening statistically? Number two, there's what eight people who are in the NBER business cycle committee call it recession or not recession. And number three, there are, let's just call it, vibes, the way that people feel about the economy, which sometimes comports with the economic

statistics, and is sometimes a reflection of media representations, who's in the white, House, whether or not they get a good feeling from that president sit in the Oval Office. But these three things, stats, terminology, and vibes really are different. I want to end with a question, a mystery that your buddy, Jason Furman, has been talking about. Jason's been on the show a few times. And he's made this point that there's this very strange and actually historically large gap between the labor market and the economy. We've been circling this point a lot in the last few minutes.

If you believe the numbers, then the gap between the strength of employment growth and the decline in GDP growth is just about as large as anything we've ever recorded. And if you do believe that the numbers reflect reality, it suggests that productivity has plummeted. Because if you think about it, like if I double my work hours producing this podcast, but I produce fewer podcasts, my output decline, my work errors go up, my ringer bosses can totally say, Derek, what's up? Your productivity is absolutely crashed here. So how do you think about this productivity mystery? What do you think we're actually looking at here? Well, first, let me say, when you said my buddy, Jason Furman, it sounded like you're being sarcastic. He is a dear friend of mine. I've known him a lot of years. I think that this topic of productivity growth is probably the most important subject

that gets the least attention from the broader public. In the minds of economists, this is paramount absolutely, you know, one of the number one most important things. And most people have never even thought about it and they don't consider it. I think this report shows de facto negative productivity growth because it's taking more jobs to do less output. This follows on the heels, though, of an even bigger puzzle or a more frustrating puzzle, which is from the month before COVID to even today, real output is higher than it was in January of 2019.

The labor force and the number of workers is down. So we're getting 4% let's say more output from fewer employees. So real productivity went up 4%. And that means in the economist world, real wages, the wage over and above inflation should have been able to go up by 4%. And real wages were down. So some very strange thing is going on. As you know, we never want to make too much out of any one report. And that's especially true on productivity. So yes, this productivity measure is epically negative, but there's a lot of noise in productivity. And I still think this taking a step back and looking over a few years and trying to reconcile how productivity could

be going up and wages going down in real terms, that's going to be. there aren't many things that are more important than that. Hopefully, this is simply a reflection of, let's call it, weird composition effects that, you know, certain, maybe what's happening in this report is you have a bunch of people in low productivity, lower productivity occupations, zooming back into the labor force. And so it's kind of bringing the average productivity down. And what kind of jobs would those be? I mean, that'd be low, low wage, lower skilled jobs like in the service sector. Let's say what was happening is massive rebound of hospitality, leisure and hospitality workers and people going

back and working as waiters and waitresses and lower income flight attendants or whatever it might be, then in a way, average wages and average productivity are going to look like they're coming down, even though none of them are really coming down. That might just reflect the composition. But this question, this question of, it kind of goes back into our category of a bunch of things that look very strange. Yeah. So what I, my big theory about what's happening, I suppose you could call it. call it a composition theory, but for me, it was sort of like a stylized story. Like, here's a

scenario that I thought of. Let's say you own a restaurant. And every month during the Great Resignation of 2021, one-seventh of your workers quit. And that is roughly what we saw in the high points of the Great Resignation, like almost one in seven, one in ten workers at places like restaurants quitting every single month. So now you've gotten almost all new kitchen staff and wait staff, and you can't train them fast enough. And the new chef, keep like, you know, messing up the nightly specials and the waiters keep dropping and shattering plates. And every week, someone seems to get COVID. So, like, yes, if you look at, like, employment statistics, your restaurant is fully staffed, but you're not working at full capacity

at all. And this is kind of like a sort of experience bubble. There's this bubble where there's a lot of people who come back to the economy, but they're low experience. And to your point, they're working in low productivity sectors. So the chief executive of Delta Airlines recently just described exactly this sort of scenario with his company. He said, quote, in a recent earnings call, quote, since the start of 2021, we, Delta, have hired 18,000 employees. A chief issue we're working through is not hiring, but a training and experience bubble, coupling this with the lingering effects of COVID, end quote. And it seems to me that maybe there's this sort of experience bubble happening right now where you have a bunch of people being hired really, really quickly

into these sectors. The companies can't train them fast enough. The chefs and the waiters and the flight staff are all just making these little mistakes. Yeah, that's a fascinating idea. Look, if you were a PhD student or assistant professor, I'd be telling you, go get the data. That's a good hypothesis to test. You would think that as the information comes in, we will be able to figure that out. At the least, we will be able to look at whether the productivity losses are greatest in places where they've had the highest turnover. And we'll be able to, so I think that's a fascinating hypothesis of what's going on. And it would explain why you might see something different in services than in manufacturing,

where they've been kind of absolutely pushed to the edge of their capacity. and we're probably going to see some fall off. The Peloton manufacturers of the world are going to see a drop in their demand while Delta Airlines is going to go up. Austin Goolsbee, thank you very, very much for talking me through Vibe Economics

and whether or not we are in a philosophical recession. Yeah, it's great talking to you again, Derek. I'm Derek Thompson. That was plain English. Thanks very much to our producer, Devin Manzi. If you have any questions, comments, ideas for future episodes, please shoot us an email at plain English at Spotify.com. That's plain, no space English at Spotify.com.

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