Only once, in 1947, was a recession not declared when real GDP dipped twice in a row

Economists at CUNA, NAFCU and beyond said the U.S. economy seems to be dodging a recession despite Thursday’s report of a second drop in a row of quarterly gross domestic product.

The U.S. Bureau of Economic Analysis said its GDP index that is adjusted for seasonality and inflation (real GDP) fell 0.9% from the first quarter to the second quarter, after falling 1.6% in the first quarter.

Since at least 1947, recessions have almost always been declared when those figures drop for at least two quarters in a row.

CUNA Senior Economist Dawit Kebede said the guide is not the rule. But he said the economy could be brought down by future Fed rate hikes in addition to the historically large 75-basis point increases announced in June and on Wednesday.

“We are not in a recession just because we have two quarters of decline,” Kebede said. “Consumer spending and a strong labor market continue to be the firewall against a significant and widespread decline in economic activity. However, Federal Reserve’s resolve to fight inflation by slowing consumer demand will thin out this defense.”

Mike Fratantoni, chief economist for the Mortgage Bankers Association, also said the economy is not in recession.

“The headline of a second straight decline in real GDP highlights the abrupt change in the path of the U.S. economy, but the ongoing strength in the job market and other signs of growth make it unlikely that this will be categorized as a recession at this point,” Fratantoni said.

Those assessments will need to scale a steep mountain of history.

Economists and policy makers defer to the National Bureau of Economic Research (NBER), a nonprofit group based in Cambridge, Mass., for declaring recessions and setting their start and end dates.

NBER looks at monthly data — often declaring recessions months after they ended. A more timely rule of thumb is that a recession occurs with two consecutive quarters of decline in real GDP.

Since World War II, NBER has declared 12 recessions, the most recent being one of the shortest: the COVID-19 pandemic recession from February through April 2020.

Eleven of the 12 recessions coincided with at least two consecutive drops in real GDP.

Only once, in 1947, was a recession not declared when real GDP dipped twice in a row: 0.3% in the second quarter and 0.2% in the third quarter. And NBER declared a recession occurred in 1960-1961, when there were no consecutive quarters of declines in real GDP.

NAFCU Chief Economist Curt Long didn’t say whether the economy is now in recession, but he said the economy is “clearly slowing.”

“The question is, will it be enough to bring down inflation, but not so quickly that it leads to a major recession?” he said.

“For now, the underlying economic momentum is enough to avoid triggering wide-scale layoffs,” he said. “But the outlook remains concerning given that the Fed has little evidence at this point to justify pivoting off its aggressive tightening.”

Fratantoni reaffirmed the MBA’s July 19 forecast, which expects the economy to grow 0.6% for all of 2022, and 1.5% per year in 2023 and 2024 — “with downside risk as the full impact of the Fed’s rapid rate hikes is realized over the next 12 months.”

Some of the trends shown by the BEA’s reports reflect an economy recovering from disruptions from the COVID-19 pandemic. Fratantoni said the second quarter might have shown net growth if not for a sharp contraction in inventories, “which likely reflects ongoing challenges with supply chains.”

“Consumer spending on goods is growing more slowly, and consumer spending on services is picking up. This is an ongoing normalization as the effects from the pandemic wane. The travel and hospitality industries are certainly seeing a rebound,” Fratantoni said.

The report showed a 14% drop in residential investment — “yet another signal that the spike in rates brought the housing market to a sudden halt,” he said. “Housing tends to lead the rest of the economy, and we expect that pattern will hold this cycle as well.”

Jim DuPlessis

A journalist for decades.