USA: Is the world’s largest economy in recession?

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United States

recession or not? Speculations on the state of the US economy after two consecutive negative quarters

The US economy contracted again in the second quarter of 2022. This means that the world’s largest economy is in recession – although many indicators say the opposite.

When Jerome Powell was asked this week whether the US was in a recession, the country’s top central banker didn’t hesitate. No, Powell replied, also referring to the booming job market: “There are simply too many areas of the economy that are doing well.”

The statisticians of the Joe Biden administration have a different opinion. On Thursday, the Department of Commerce published an initial estimate for economic growth in the second quarter of 2022. According to this, the largest economy shrank by 0.2 percent from the beginning of April to the end of June – also because many companies were left with their inventories in the spring.

The high rate of inflation is causing resentment among consumers in the USA. However, many people’s wallets are still loose.

key stone

Since the statisticians had already calculated an economic downturn of 0.4 percent (compared to the previous quarter) for the first quarter, the US economy is currently in a recession. Because an old rule of economics says: If an economy shrinks two quarters in a row, then one can speak of a recession.

No sell-off mood on the stock exchange

Nevertheless, there was no sell-off mood on the US stock exchange on Thursday: At the start of trading, the leading indices were all only slightly in the red. The tide turned later and the stocks rose compared to the previous day.

An explanation for this: The figures for the second quarter, which were published on Thursday, are a water level report. Experience shows that the first published GDP figure has to be corrected in the weeks that follow.

But perhaps more importantly, in the US, TBEN organization National Bureau of Economic Research (NBER) is tasked with declaring the beginning and end of a recession. The eight responsible NBER economists are not only guided by the economic figures; they also take into account labor market figures, consumer sentiment and indicators such as the savings rate.

Because the NBER is proceeding extremely slowly – the responsible committee only declared the end of the financial crisis in September 2010, more than a year late – the work of the economists is ignored by most Americans.

Biden does not want to speak of a recession

The White House is an important exception. Because President Joe Biden is already facing headwinds in terms of economic policy – keyword: high gasoline prices and an inflation rate of 9.1 percent in June – he absolutely wants to prevent the USA from tumbling into a recession . The Democrat therefore preferred to speak on Thursday about a new bill in the Senate that is intended to reduce inflation and introduce a minimum tax for companies.

“It’s no surprise that the economy is slowing down,” after last year’s record growth, Biden said. And his economic adviser Brian Deese announced: “Technically, it’s not a recession.”

This strategy may work in the short term. In the longer term, however, if the unemployment rate rises sharply and consumer sentiment continues to plummet, then Biden will also have to use the “R word”.

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