Do consecutive quarters of negative GDP equal a recession?

The U.S. economy contracted for two consecutive quarters to start 2022. Gross Domestic Product (GDP) declined by 1.6% in the first quarter and 0.6% in the second quarter. Recessions are determined by the National Bureau of Economic Research (NBER) and they don’t release their findings until AFTER the recession has occurred. That is because they define a recession as an economic contraction starting at the peak of the expansion that preceded it and ending at the low point of the ensuing downturn. They can not declare the recession until after the bottom has been reached. Since most investors invest in the future (not the past), they have developed a popular rule of thumb to help them navigate through the economic cycle. Specifically, they believe that two consecutive quarters of decline in GDP constitutes a recession.

So what happened in the first quarter that drove down the economy? The Omicron variant of COVID-19 is what happened in the first quarter. There wasn’t much doubt about the economy being in contraction. The Omicron variant affected a lot of people, caused a lot of disturbances in the economy and depressed spending.

The second quarter was a lot closer to break even. The metric that threw the second quarter into contraction was the over-ordering of product by businesses that turned into stagnant inventory in the second quarter. As COVID waned from people’s collective mindset, there was a significant shift from spending on items to spending on services (and vacations). So while the shift to services was significant, it wasn’t enough to overcome all of the physical goods that did not sell.

But were we really in a recession in the first half of the year? It didn’t feel like a recession. Unemployment is near a 30 year low (3.5%). Everywhere you go, things are packed (restaurants, stores, etc). The biggest issue facing employers is not being able to hire enough employees to service their customers.

In the end, I think that the NBER will not declare the first half of 2022 to be a recession. The brisk economic activity and the low unemployment rate will trump the decline in GDP.

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