With June seeing an inflation rate of 9.1 percent — the highest it’s been since the 1980s — an average trip to the grocery store hasn’t felt so average. As the price of essential goods has been rapidly increasing, so too has talk of a recession.
However, the signals seem to be mixed.
While high inflation and a falling Gross Domestic Product (GDP) seem to indicate a weakening economy, the U.S. job market has shown no signs of slowing down. July’s unemployment rate fell to 3.5 percent, marking the first return to pre-pandemic rates.
The conflicting economic indicators have sparked debate regarding whether or not the U.S. is currently in a recession. But what defines a recession, anyway?
The Makings Of A Recession
Put simply, a recession is characterized by a decline in economic activity. Many factors go into formally determining a recession; however, according to economics professor Dennis Jansen, there’s also an unofficial definition used more generally by the public.
“The rule of thumb definition that the press and many commentators use is two consecutive quarters of negative real GDP growth,” Jansen said. “And we’ve had that.”
GDP is a measure of the monetary value of all the goods and services produced in a country. In short, it’s an indicator of the overall health of the economy. This year, GDP has fallen for the second quarter in a row, the first quarter dropping 1.9 percent and the second 0.9 percent.
“But the rule of thumb is just that, it’s a rule of thumb,” Jansen added. “The only official arbiter of a recession is the National Bureau of Economic Research, or the NBER.”
The NBER is a private, non-partisan organization that houses the Business Cycle Dating committee — a team of eight prestigious economists who track data related to the ups, downs, and plateaus of our business cycles.
The committee’s official definition of a recession reads, “a significant decline in economic activity that is spread across the country and lasts more than a few months.”
However, due to their extensive processes of analyzing data and determining a “significant decline,” official statements usually aren’t released until months after the fact. For example, Jansen noted that it took the team over a year to formally declare February to April of 2020 a recession.
“It takes them a long time to act,” Jansen said. “We’re going to wait a long time to hear whether we officially have a recession or not, which is sort of why people like the rule of thumb.”
So, What’s Going On In The Economy Right Now?
Although the NBER’s definition of a recession doesn’t explicitly mention the job market, it’s clear that the current unemployment rate is not consistent with a standard recession.
“Usually in a recession, some bad things happen to the economy and then we have a cycle where the labor market is getting weaker, unemployment is rising, and GDP is falling— all at the same time. That’s the typical recession,” Jansen said.
However, job creation is continuing to trend upward as 528,000 jobs were added to payrolls in July.
“The labor market shows no sign of a recession, or very little,” Jansen noted, marking a stark contrast to the implications of our inflation rate.
However, the U.S. is not the only country experiencing price increases.
Jansen shared that in part, some economists attribute our inflation to an excess of COVID-19 stimulus payments distributed.
“That was the story a year ago in the summer and in the fall,” Jansen said. “More recently, the inflation rates in some European countries have gotten close to, or even above what’s going on in the US.”
Jansen shared that the inflation seen around the world may be a result of supply chain disruptions stemming from the war in Ukraine and tight COVID restrictions in China.
Regardless of the causes, it’s clear that inflation is currently a widespread concern.
“If every central bank in the world is trying to slow economic activity, you have a much stronger impact on every country,” Jansen noted.
The Misnomer Of The Inflation Reduction Act
The Inflation Reduction Act was recently signed into law by President Biden, but is more closely aligned with addressing climate than inflation.
Jansen noted that the act is estimated to have almost no impact on inflation. He pointed to a few widely known, apolitical models that back this up: the Penn-Wharton Budget Model and the Tax Foundation.
“They estimate that the Inflation Reduction Act will very slightly increase inflation until 2024 and then very slightly decrease inflation after that. The estimates of this increase or decrease are so small that it’s actually statistically insignificant,” Jansen explained. “Basically, it’s going to have no effect on inflation.”
Moving Forward And Keeping Up
As the state of the economy continues to show mixed signals, it’s crucial to pay attention to what’s going on.
To get started on keeping up with the economy, Jansen suggested engaging with online newspapers or magazines that deal with economic matters, such as the Wall Street Journal, CNBC, and The Economist.
For students, his biggest piece of advice is to take an economics class — sooner rather than later.
“Inflation is like a hidden tax,” Jansen said. “It makes planning quite difficult and things hard to figure out, but it’s important to at least be aware these things are happening.”