After Two Quarters of Economic Contraction, Is It Time To Announce a Recession?

July closed with more dire news on the economic front: on the last Thursday of the month, the Bureau of Economic Analysis published its figures for the second quarter. So far, the country’s GDP has contracted by 0.9% between April and June – meaning that we have now been experiencing two consecutive quarters of economic contraction.

At first glance, this coincides with the dictionary definition of “recession” – but depending on who you ask, the topic is far from a closed matter.

What’s Been Going on with the US Economy?

The White House, stakeholders, and independent bodies have quickly contradicted this view. Economists from Moody’s Analytics have outright denied a recession. The National Bureau of Economic Research (the nonprofit tasked with being the official arbiter of economic periods) has steered clear of any verdicts.

To truly understand what’s going on, we need to analyze the GDP’s recent fluctuations in context.

Late 2021: Coming out with a vengeance

Following the near (but largely artificial) freeze of 2020, the economy showed signs of accelerated recovery. This became especially noticeable during the final quarter of 2021, where unprecedented job growth combined with a 6.7% expansion of the economy.

Much of this growth was not sustainable: eager to replenish stocks that had dwindled during the pandemic, different sectors chose to ramp up production. Big box retailers made big purchases, stockpiling imports and increasing the trade deficit.

The optimism wasn’t meant to last. Fueled by government spending, stimulus checks, and dwindling supplies, inflation began to rear its ugly head during these months.

Slowing down for 2022

By the start of 2022, the rapid growth seemed to be losing steam. Regular consumers, confronted with a rapidly-rising cost of living, began spending less. Warehouses slowed their purchases, retailers saw their sales forecasts shattered, and the rising cost of commodities made it harder to plan for the future.

By the end of 2022’s first quarter, the country’s economy had contracted by 1.6%, and analysts began warning of further issues. Initial estimates predicted negative growth of -3.8% by the end of the year – but as the year progressed, the figure was revised to -8.4%.

Why An Official Announcement May Be Premature

According to Jacob Kirkegaard from the Peterson Institute for International Economics, the combination of inflation and rapid price fluctuations can “paint an overly negative view” for consumers and investors alike.

The current contraction of the GDP is indeed worrisome, but it may not meet the full criteria for a recession just yet. For this to happen, we would need to see broad, long-term weaknesses across all economic sectors. Much of the contractions experienced during early 2022 could be read as signs that the Federal Reserve’s anti-inflation policies are working – meaning we may still have to wait two more quarters for a “long term” effect.

The final silver lining? Job growth continues, with 450,000 new jobs created over the last semester. As a result, the Federal Reserve would like us all to slow down with the doomsday predictions for a little longer.

Grassroots Pulse covers public policy and political issues aimed at engaging highly-active policy makers, donors, and grassroots leaders at the forefront of the political process in America today.

Share this article on

Read more