Today, Explained - Are we in a recession?

Episode Date: July 28, 2022

The US economy has shrunk for two consecutive quarters. That’s technically a recession. But economists aren’t so sure we’re actually in one. Madeleine Ngo and Jacob Goldstein explain. This episode was produced by Avishay Artsy and Miles Bryan, edited by Matt Collette, fact-checked by Laura Bullard, engineered by Efim Shapiro, and hosted by Noel King. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

It's Today Explained. I'm Noelle King. New GDP numbers indicate the U.S. economy contracted for a second straight quarter. That is one way we define a recession. But there are caveats upon caveats upon caveats here. Today's report is going to be revised and updated more than once in the next few months, as it always is. And the National Bureau of Economic Research ultimately makes the call on recessions in the U.S., and that takes months. Also, GDP alone does not determine what's what recession-wise, which is why the term technically is being thrown around a lot today. But recessionary vibes, like the ones we're seeing, do have real effects on hiring,

investment, and markets. Coming up, what to expect, what not to expect. Are we guessing? Yes, but so is everyone else. Groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit superstore.ca to get started. Maddie Ngo, economic policy reporter at Vox. Big day for you. Welcome. What do the numbers tell us? So today's report found that gross domestic product adjustedenths of 1% on first look at second quarter GDP, down nine-tenths of 1%. Okay, I know there's an organization that decides whether we're in a recession or not,

but investors, they're not going to wait. And what does that mean, two quarters of contraction? Why is that big news? Sure, so a common rule of thumb, and it's an unofficial definition of a recession, is that two quarters of negative GDP means that the country has entered a recession. That being said, though, that doesn't necessarily mean that we are in a recession just because recessions are officially declared by a committee of economists at the National Bureau of Economic Research. And so they do evaluate GDP, but they also look at other important economic indicators, like the labor market, for instance. We're seeing all these headlines. The Financial Times one is my favorite. The U.S. is in a technical recession. But when does the National Bureau of Economic Research weigh in? When might

we get their take on whether the country's entered into a recession? Yeah, so it typically takes some time. On average, at least a year. It can take longer. It can also take a shorter amount of time. But typically, I would say about a year because they need to take the time to evaluate the data and they want to be absolutely certain. So that's why they take their time. So Maddie, we got the GDP numbers today. And then is that the end all be all of this report? No, the numbers do get revised pretty often. We are going to see revisions in the next few months, which is pretty common. So the numbers could tell us something completely different. Just because it's negative today doesn't mean that the revision won't show that, for instance, GDP could have been positive in the second quarter. So as more data comes in, the Commerce Department will reevaluate and release its updates.

Okay, so in a couple of months, everyone who's freaking out today might be a little bit embarrassed. But by that time, we'll have forgotten. That's what we're good at. Why do we pay so much attention to GDP numbers on the day they're released, particularly because, as you just said, they're revised over time? I don't know if I have a great answer for this. I think just in general, people pay a lot of attention to GDP because it's a broad measure of the nation's economic health, and so people are paying a lot of attention. I think people pay a

lot of attention to right now, especially because there's already just been a lot of talks about a recession. And so when those first numbers come out, I think people are just trying to, you know, sort of look at any indicators that show whether or not we could possibly be in a recession right now. Maddie, because a recession is such an important thing, and it does have bearing on our day-to-day lives, whether we're in one or not, and it does have bearing on our day-to-day psychology, whether we're in one or not,

why are there multiple definitions? Why don't we just agree on one and stick to it? I think it's more so that there are just a lot of different interpretations of what a recession can look like. And I think that because the National Bureau of Economic Research has such a broad definition of a recession and because they take a while to actually declare one, that then leads people to have different interpretations or have different definitions or certain benchmarks that then make them conclude that we are actually in a recession. Okay, so on July 28, 2022, we have two quarters of contraction. That does technically signal a recession at this moment. What should we expect to follow? How do businesses and consumers tend to change their behavior knowing that we're technically in a recession?

I've asked this question to economists. And yes, I think seeing headlines about the United States being in a technical recession can have an impact on something like consumer sentiment. And it can make consumers sour on the economy. And so I think if consumers then see these headlines about the United States being in a recession, they could potentially pull back their spending, which is bad for economic growth, which is then bad for GDP. It probably wouldn't be the major driving force that sends us into an actual recession, but it is not a positive impact. How is the Federal Reserve responding to this so far? We're talking about an hour and 15 minutes after the numbers have been released.

Has the Federal Reserve said anything? Have they indicated anything? So, no, I don't think the Fed has said anything at this moment. Yesterday, the chair of the Federal Reserve, Jerome Powell, had a press conference announcing the Fed's latest policy moves on inflation. Notwithstanding the recent slowdown in overall economic activity, aggregate demand appears to remain strong. Supply constraints have been larger and longer lasting than anticipated, and price pressures are evident across a broad range of goods and services. So yesterday the Fed increased interest rates another three quarters of a percentage point. So essentially that means that interest rates are going to climb higher. Things like mortgages and car loans are going to become more expensive.

But yesterday, Jerome Powell said that. I do not think the U.S. is currently in a recession. And the reason is there are just too many areas of the economy that are performing too well. And of course, I would point to the labor market in particular. And so if you have very smart people saying, look, at this moment, regardless of what GDP is telling us on this day, I don't think we're in a recession. How helpful is it for us to fixate on whether we are technically in a recession or technically not? I do think that if consumers see these sort of doomsday headlines saying that the United States

is technically now in a recession, that could make them more worried. They could become more nervous about losing their jobs, losing their sources of income. And so that in turn could make them pull back on spending on goods and services, which in turn is not good for economic growth or GDP. That probably wouldn't be the main or driving force that sends us into a recession, but it's not a positive impact. Maddie, what are you going to be looking at next? What are the indicators you're looking at next to determine, maybe not so much whether we're in a recession or not, because we do have to wait for that. But how strong the economy is or is not? So there are a number of indicators that I'll be looking for.

In terms of the labor market, I'm definitely going to be looking for any changes in the unemployment rate. So far, it stands at 3.6 percent, which is only slightly above what it was before the pandemic. And it's at a historically pretty low level. I'll also be looking at the number of jobs added to the economy. So the jobs report is coming out soon. In June, there were about 372,000 jobs added to the economy, which is a pretty robust number. And so I'll be looking at changes in the labor market.

I think some signs of cooling in the economy. Obviously, we're seeing consumer spending start to cool, which Jerome Powell acknowledged yesterday. I'm also, in terms of the labor market, also going to be looking at initial jobless claims. So how many people are filing for unemployment benefits, since that could signal sort of economic downturn there. Coming up next on Today Explained,

as Maddie laid out, there is no ur-definition of what a recession is. However, there is something that economists overwhelmingly agree on. Growth is good. But, we will ask, why do they think that? Support for Today Explained comes from Ramp. Ramp is the corporate card and spend management software designed to help you save time and put money back in your pocket. Ramp says they give finance teams unprecedented control and insight into company spend. With Ramp, you're able to issue cards to every employee with limits and restrictions and automate expense reporting so you can stop wasting time at the end of every month.

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A second straight quarter of GDP contraction is not good. Growth is what we want, not contraction. But why do we want growth? What does it really get us? Jacob Goldstein is a longtime economics reporter. He hosts a podcast called What's Your Problem? about people trying to solve tricky problems. He also wrote a book called Money, the True Story of a Made-Up Thing. Jacob, where does the story of GDP start? GDP is something that was invented, right? It's not something that exists in the world in its natural state.

And it was invented in the Depression by an economist named Simon Kuznets in the United States. And it's really interesting, actually. You know, GDP is basically what people mean when they say the economy. The economy grew, the economy shrank, whatever. What they typically mean when they say that is GDP. And until the Depression, people didn't really talk about the economy.

There wasn't this idea of this aggregate thing. They might track how much wheat was grown or, you know, rail shipments or, you know, how many ships came into the harbor. But there wasn't some aggregate abstraction that people had in their minds. And then we get into the Depression and it's clear that things are really bad, right? And Roosevelt's like, how bad is it? And they're like, well, the hogs, blah, blah, blah, the wheat, this, this, this. And it becomes clear that it's like, no, no, we really need to get our arms around this thing. And so Simon Kuznets leads this group of people who invent what becomes ultimately GDP, gross domestic product, of a way to sort of boil down the economy of a whole country to a number. And we get through the dark years, we start measuring things, we decide that measuring

is really good. And we get these numbers. And it makes me wonder, what does GDP mean for how I live today? Like, does my life change based on what we've just learned about these GDP numbers? So there's a few ways to think about that, right? Does your life change based on what happened with GDP in the last three months? And does your life change based on what happened in GDP in the last 10 years or 50 years, right? Like, definitely 10 years, 50 years, yes, a lot, right? And I think that the simplest way to think about the long-term change is if you think about different countries today, right? Think about people in the United States. People in the United States, Americans who came here from other countries, typically

came from countries where GDP is much lower, right? That's the way global migration tends to work. And like, clearly their lives are profoundly different in the United States. And that change in their lives is largely driven by the change in GDP, right? So that's a useful way, I think, to look at long run GDP growth and how big of a change it makes. Now, the sort of quarter to quarter numbers obviously don't make that kind of difference. I think the most meaningful thing that tends to happen when GDP goes down, which isn't that common, is people lose their jobs, right? This is kind of a weird moment.

Now we have high inflation. We're still in this post-COVID economy. But in general, when GDP goes down for a while, for a year, almost always unemployment goes up, right? So that is the obvious impact of short-run GDP. And conversely, you know, like after the financial crisis, we had this long run of GDP growth and we saw, as you might expect, unemployment kept coming down and coming down and coming down.

More and more people were able to get jobs. So I think in the short run, jobs are the like obvious, meaningful thing in the world that is really closely tied to what GDP is doing. And is that why economists place such a high priority on growth? Like, why is growth the thing? I think growth is the thing more for the long run reason, more for the 50 year reason or the 200 year reason. You know, I mean, the norm for human history was not growth, right? It was basically stasis. And the material conditions for almost everybody who lived up until, say, 1800 were

gruesome, right? Were just incredibly grim. And then you have basically the Industrial Revolution, and it kicks off this period that we are still living in, but that in human history is relatively brief, where we go from incredible scarcity to incredible abundance. And it is essentially GDP growth that has done that. What does GDP not measure? What doesn't it take into account? I mean, it doesn't measure almost everything, right? It measures basically the value of everything everybody in a country makes it work, more or less.

I mean, you could say the value of all the goods and services produced in a country, but basically the value of everybody's work, monetary value, which is a lot, but most of the world is not that, right? So there are sort of classic things people point out that are omitted. One of the classics from the very beginning, actually, that was sort of controversial, they talked about should we put this in or not, was household work that is not done for

money, right? So if I take care of my kids, that's not in GDP. But if I pay somebody to take care of my kids, that is in GDP. So that's like kind of a weird one. The big, I think today, important stuff that's not in GDP, the big, big one globally is pollution and carbon dioxide emissions in particular, right? Like an important knock on growth is that this 200 years of incredible economic growth we've had has had really bad environmental consequences. And today,

the most urgent one is climate change. And like, that is not captured in GDP. And that's a problem if all you're looking at is GDP. And then there was that speech that Bobby Kennedy gave in 1968, where it sounded kind of hippy-dippy, but Kennedy was no hippie. But he was like, you know, GDP, or I think he was calling it gross national product in that speech, actually. He was saying it doesn't measure how well our kids are educated. It doesn't measure how cohesive we are as a society. It doesn't measure happiness, basically. It measures neither our wits nor our courage, neither our wisdom nor our learning,

neither our compassion nor our devotion to our country. It measures everything in short, except that which makes life worthwhile. And it can tell us everything about America, except why we are proud that we are Americans. So GDP can't do everything. But you have countries like Bhutan, where they measure gross national happiness. The small Himalayan kingdom has a unique system that measures development through spiritual and emotional growth instead of material production. Does this seem ridiculous to you?

Or does this seem like something that maybe could legitimately accompany GDP? Yeah, I mean, yeah, Bhutan has it. New Zealand also introduced an alternative measure to GDP recently. It would no longer be good enough to say a policy is successful because it increases GDP, if at the same time it also degrades the physical environment or drives down wages or fractures a community. I think GDP is useful but limited. I talked once to somebody, an economist who wrote a book about GDP, and she said, it does what it says on the tin.

She was British, right, so she could get away with saying that. Which is, like, I think perfect for GDP. Like, it's useful. It's useful to know what's going on in the economy, right? And of course, it's not all we should care about. And, you know, Kennedy is way more articulate than I am, obviously, but he's right. But that doesn't mean we should abandon it. It just means we should keep it in its proper place, which is like, it's a big, important number, and it's not the only thing that matters. Is anyone seriously proposing that when we look at growth, we should like knock points out of GDP

if the growth we're seeing means that we had to raise a rainforest in the Amazon? Like, is there anybody arguing for nuance within GDP? It's an interesting idea. I mean, a more straightforward move is just use GDP for what it's good for and, like, pay a lot of attention to how much carbon dioxide we're putting into the air, right? Like, that seems fine to me. And to be clear, it's not like everything the US government does is aimed at maximizing GDP growth, right? There are instances where we decide we're just not going to let people do this thing.

We're not going to let people pollute in streams, even if it, you know, reduces GDP growth. We're going to pass the Clean Water Act. And like a carbon tax, which is economists' favorite idea for fighting climate change and seems like a very reasonable idea to me, certainly better than nothing, which is close to what we're doing now, right? You can debate what would it do to GDP, but like even if it were to push GDP down, great, do it. I think the answer to the environmental problems that have come with growth is not to like abandon GDP. It's just to use it for what it's supposed to be used for and not have it be the sole North Star of everything we do. So the other day, my co-host Sean mentioned that he had recently switched from an iPhone 5

to an iPhone 13. And that made me laugh because there are a lot of phones in the middle of that. And the point is supposed to be that we buy an iPhone every two years. You know, they become obsolete. It's part of the plan. Sean's a bad contributor to gross domestic product. If we break it down the way I understand it, there is an iPhone that didn't get sold every two years because he held out.

I mean, I'm impressed. I mean, the core, let me just start by saying I'm impressed that he went that long. It doesn't mean that his next one's going to be an iPhone 21 or whatever the math is. I think it's important to think about what is our economy, actually, and we think of it as stuff. We think of it as iPhones and garbage, right? You have kids, and they're just always getting these garbage toys, and it's just garbage, garbage, garbage, stuff, stuff, stuff. But in fact, it's not that, right? Our economy is mostly services.

We pay for healthcare and education and streaming services and, you know, whatever, podcasts. And that's really, really important because it offers this hope, right? The hope is we can have economic growth in services without using more stuff, without harming the world more. Decoupling is the phrase for it. Because for a long time, indeed, economic growth meant consuming more energy, consuming more stuff. But you see now in the developed world, those two things are decoupling.

So you can have economic growth and use less energy, right? Now, can you have enough, right? Can you have enough decoupling to sort of get us out of this environmental catastrophe we're heading for? I don't know, but it's definitely possible. And so I think thinking about economic growth, not as meaning more stuff, but as meaning to some extent better stuff, to some extent, just more services, paying people to do things for us, like that is a really essential idea. And to me, the most hopeful way out of this sort of conundrum of growth on the one hand and environmental destruction on the other is this decoupling idea, this idea of looking for ways to continue economic growth without more stuff. So no, you don't have to keep buying a new iPhone. So for hundreds of years, there was no growth. Everyone was kind of like getting by.

And then we started growing. And now here we are in a situation where, I don't know, a lot of people are doing a lot better than they were 100 years ago. A billion people lifted out of poverty since like 1990. I just wonder what would be, and I admit I'm saying this from the United States of America, a very rich country, but what would be the problem with stasis? What would be the problem with not growing? You flagged at the end there in your outgoing caveat, maybe the biggest thing to think about there, which is most of the people in the world are not nearly as rich as most people in the United States in the developed world, right? And most of the emissions are going to come from the people who are not as rich as we are.

And so to speak globally, like I couldn't imagine saying to people in the developing world, sorry, you don't get to develop anymore. Furthermore, what would that even mean? How would it work? And on another level, it would turn the economy into a zero-sum game. How? If you don't have growth, then any person who's doing better is doing so at the expense of someone else. And that seems bad to me. Thank you. and our newest producer, Amanda Llewellyn. Welcome, Amanda. Also my co-host, Sean Ramos-Furham. Our supervising producer is Amina El-Sadi.

Vox's VP of audio is Liz Kelly Nelson. The show uses music by Breakmaster Cylinder and Noam Hassenfeld. We're distributed to public radio stations across these United States in partnership with WNYC. I'm Noelle King. Today Explained is part of the Vox Media Podcast Network.