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Friday, Sep 22, 2023

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Biden’s word play can’t save the United States from a recession

Some denials are more worrying than their absence. A company insisting that its director will be vindicated by the forensic auditors is unlikely to succeed in calming investors; a sports team insisting it has total confidence in its coach is likely to receive a flurry of speculative applications; and a president insisting that ‘we’re not gonna be in a recession in my view’ is unlikely to do consumer confidence a great deal of good.
The major difference here is that the White House has the advantage of being able to mark its own homework. No matter what today’s GDP data shows, Biden’s team will be able to claim the US is not in recession by the cunning mechanism of simply choosing a different definition. Output’s fallen for two quarters in a row? Actually, we think you’ll find it’s a bit more complicated than that; you need to take a holistic view of the economy.

You are probably familiar with the first definition. You’ll find it being used by everyone from the Bank of England to Goldman Sachs to the European Central Bank. It’s even been used by economists at the US Federal Reserve. Take this transcript of a May 1979 meeting of the open market committee responsible for setting interest rates. Called to give forecasts, an economist presenting to the august figures of the committee defines a ‘technical recession’ as ‘two consecutive negative quarters’. Nobody bats an eyelid.

This meeting is particularly interesting given a little more context. It took place at the height of the great inflation, with prices that year rising over 13 per cent as the US economy was buffeted by sudden shocks to energy costs. The second was the presence of one Paul Volcker. In August that year, Volcker would be made chairman of the Federal Reserve. His policies would break the back of inflation, returning the economy to normality at the cost of a steep recession – a historical parallel unlikely to comfort Biden.

The two quarters definition is simple, understandable – and not official in America. As widely adopted as it is, there are other definitions available. Treasury Secretary Janet Yellen has debunked the naive idea that a technical recession is a technical recession, pointing instead to the definition used by the National Bureau of Economic Research.

The NBER dates recessions based on ‘economy-wide measures of economic activity’. Because they’re looking for a big drop in economic activity, across a big chunk of the economy, over an extended period, there is ‘no fixed rule’ for measures and weights. It’s unlikely to declare the US in recession any time soon. This has very little to do with technical definitions: the business cycle dating committee doesn’t like to put a date on peaks and troughs until all the data is in, which takes time. This raises the interesting mental image of Team Biden sitting there declaring all is well while the economy burns down around their ears, waiting for the official proclamation that there is in fact smoke to the fire.

It’s not necessarily the case that the US is about to enter a downturn under any definition. The indicators used to argue that the US is not in recession – employment, industrial output, consumer spending – still show signs of growth. But employment is a lagging indicator which tends to take time to adjust to new economic circumstances, telling you more about how the economy was in the recent past rather than it is now. Consumer spending meanwhile can be driven by concern over the declining value of cash as well as by confidence.

The Federal Reserve Bank of Atlanta’s ‘nowcasting’ model predicts that the US is set for a second quarter of negative economic growth. Given that the latest data is due out today, it would be quite a miss for a generally well-performing estimator if the US turns out to be growing strongly. This concern is compounded by the fact that the Fed raised interest rates again yesterday, further constricting economic activity in the hope of fighting inflation.

And this is the thing; if the US is growing strongly, then Biden has nothing to worry about. You only need to play word games if things are going badly. And while a recession is a fuzzily defined concept, that doesn’t mean that it isn’t something real; there isn’t a scenario where carefully redefining a recession away from ‘two negative quarters of growth’ saves his bacon in the midterms.
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