Janet Yellen, Treasury Secretary, Speaking at a Lecturn

As News of Recession Looms, the US Government Says “It’s Complicated”

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Historically, the definition of a recession has been accepted as 2 consecutive quarters of negative Gross Domestic Product (GDP) growth.

What is GDP?

According to Investopedia, GDP is defined as

“Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.”

Investopedia

A reduction in this number would inversely indicate that the value output of the US has been reduced.

News of a Recession

Tomorrow, July 27 2022, the Federal Reserve is expected to announce a second quarter of negative GDP growth. The value output of the US has now fallen two quarters in a row.

This isn’t surprising to people who have seen their buying power decrease at an extremely alarming rate. Just a couple of weeks ago, the Federal Reserve declared the highest inflation rate since the late 70s, at 9.1%.

The White House Fights Back

However, The White House, in a web release, points out that there has never been an agreed upon definition of a recession.

While technically true, most major news sources, dictionaries and economic outlets have generally accepted that 2 quarters of negative growth is a recession.

Paul Krugman, economist for the New York Times who recently had to admit that he was wrong about inflation, is of the opinion that the traditional definition of a recession does not account for enough factors to determine if we are in a recession.

“That’s not how recessions are defined; more important, it’s not how they should be defined, It’s possible that the people who actually decide whether we’re in a recession… will eventually declare that a recession began in the United States in the first half of this year, although that’s unlikely given other economic data.”

– Paul Krugman

So if a recession isn’t a static factor that is a description of measurement, what is it? Another definition provided by Oxford Dictionary…

“A period of temporary economic decline during which trade and industrial activity are reduced.”

– Oxford Dictionary

What is Economic Activity?

So is it that the White House’s contention is that GDP doesn’t describe economic trade and industrial activity? If not, then what should be measured to determine economy growth or decline?

Treasury Secretary, Janet Yellen, argues that the job market is going strong and this is enough to indicate the economy is still growing.

“We’ve got a very strong labor market, This is not an economy that’s in recession.”

– Janet Yellen

While she’s right about the labor market, unemployment is low, and new job growth continues to climb back to pre pandemic levels, real wages have continued a steady decline as inflation out paces salary increases.

Essentially, everyone took a pay cut in order to maintain current job numbers and the US isn’t close to bouncing back any time soon.

It would seem that labor market numbers are insufficient to describe economic activity.

So what then is the empirical measurement of a recession?

Author

  • After attempting college, AJ joined the Marine Corps. When he left active duty, he worked in retail for a few years before returning to college. Several years later AJ was awarded his Bachelor in Science in Computer Science. Soon after, AJ began working in the tech industry as a Junior Developer. AJ continues to work in tech, however, he began to cultivate a passion for personal finance. For AJ, the concepts began to click and he felt a need to help others understand how to be financially free. If AJ can do it, any Idiot can.

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