The Bureau of Labor Statistics just released its first estimate for gross domestic product (GDP) growth in the second quarter. The number was -0.9%. That is the second consecutive quarter of negative GDP growth. That means the country is officially, according to the textbook economics definition, in a recession.
Actually, that may not be exactly right.
Although the data fits the classic definition, the government decided that an independent agency, the National Bureau of Economic Research (NBER) should make the official determination. It may take some time, up to a year, to declare a recession.
The NBER considers other factors, like unemployment, when officially declaring a recession. Economists, there are likely to say that since unemployment is under 4%, we are not in a recession.
Textbook Definition of a Recession
Nonetheless, as an economist in my own right, I say that since the last two quarters indicate the economy is shrinking, we are in a recession. The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
For the last six months, economic activity has declined significantly. That is a recession.
This may be the first time in history that the economy is in recession while experiencing a severe labor shortage fueling high employment. This shortage has led to an unemployment rate way below the traditional full employment level. There are currently more than 11 million job openings and less than 6 million unemployed Americans.
This time, instead of unemployment rising significantly, which happens during other recessions, the unemployment rate will rise only modestly. Instead, the number of job openings will fall rapidly. That means companies that are having trouble hiring will simply stop seeking new workers.
As I warned in an April Newsmax Finance column, stagflation was coming and would persist through most of 2022.
Soon after, in a May 30 Newsmax Finance column, I said that recession and stagflation are inevitable — even when all of Biden’s economists and advisors said that a recession was not inevitable. In June, my Newsmax column said that the Federal Reserve is moving too slowly and with too small steps to reduce inflation, which confirmed my view that both stagflation and recession are inevitable.
Earlier this month in a July 4 Newsmax column and in a July 13 Newsmax column, I noted that all of the recent data confirms the position that once the GDP growth number is released, the economy will officially be in recession.
Stagflation, an Ugly Truth
I can take that a step further. Since the inflation rate is 9.1%, we are officially not only in a recession, but we are in stagflation.
President Biden, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have all dismissed inflation as transitory. Now they are insisting we are not in a recession and that Americans should not judge the economy by GDP and inflation.
In fact, just after the GDP figure was released, President Biden issued a statement touting the strong U.S. labor market, saying that the nation is “on the right path and will come through this transition stronger and more secure.”
Let me point out that GDP growth and price stability are two of the three goals of economic policy. The third is full employment.
Negative growth and high inflation affect nearly all Americans. Unemployment affects only the extra 3% or 4% of the population who lose their jobs when unemployment rises in a recession
Obviously, then, growth and inflation are the best indicators to judge economic performance because every American feels higher prices daily. With no growth, there is no expansion of opportunities for American households.
This is the first time in four decades that economic growth is negative, and inflation is approaching double digits. In the recessions of 1991, 2001, 2008 and 2020, economic growth was negative, but inflation was generally in the 2% to 3% range or less.
A condition where the economy is experiencing high inflation and a stagnant, no-growth economy is called stagflation. Even if Biden tries to convince the public that we are not in a recession, the economy is not growing, which means the economy is stagnant. We are experiencing stagflation.
The economic policy cure for stagflation is difficult. If the policy is geared toward ending the recession by increasing demand, that will tend to make inflation worse. If the primary goal is to reduce inflation by decreasing demand, that will tend to slow growth and make the recession worse.
Monetary & Fiscal Policy at Odds
From a monetary policy perspective, the Federal Reserve has finally made price stability its primary goal. That’s why interest rates were raised another 75 basis points yesterday. Those high rates will reduce demand and reduce inflation, but they will slow economic growth.
Biden’s fiscal policy will vastly increase government spending as he seems to have an agreement to spend another $670 billion. This will increase demand and tend to stimulate growth, but it will increase inflation.
In other words, monetary policy and fiscal policy are working against each other. That means inflation will take a longer time to fall, and growth will take a longer time to increase.
However, the first step in solving any problem is to recognize that the problem exists. Someone should tell President Biden: We are living with high inflation and recession, which means stagflation too.
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