Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate.
July 19, 2022 — On July 28, the US Bureau of Economic Analysis will release its advance estimate of economic growth in the just-completed second quarter of the year, as measured by GDP. The announcement is attracting more than the usual eager anticipation. The reason is that many observers predict that the Q2 GDP number will be negative and that this will officially confirm widespread beliefs that the economy went into recession in the first half of 2022, figuring that growth in national output is already determined to have been negative in the 1st quarter of the year. After all, isn’t a recession defined as two consecutive quarters of negative growth?
The stock market and bond markets could react to a negative number on July 28 by rising in the very short run, as investors reason that the recession reports will encourage the Fed to ease up on its path of aggressive interest rate hikes.
The chain of reasoning is probably wrong, however, as is likely to become clear in the future. There are three flaws. First, growth is as likely to turn out positive in the second quarter as negative. Second, even if the number indeed comes out negative July 28, a US recession is not defined as two consecutive quarters of negative growth, but rather is determined by the Business Cycle Dating Committee of the National Bureau of Economic Research. Third, contrary to the general belief, it is not quite true that growth in the first quarter is determined to have been negative. Thus, even if the pessimists turn out to be right about the BEA announcement on July 28, subsequent events will likely prove them wrong about the timing of a recession.
Some economists, including me, would guess that growth was more likely positive in the second quarter than negative. But, for the sake of argument, let us proceed on the assumption that the reported second quarter change in GDP is negative. After all, the Atlanta Fed’s GDPNow model is estimating a second quarter growth rate of minus 1.5 % per annum, based on data available through July 15. (IHS Markit, another real-time estimator, is also negative.)
A US recession is not defined as two consecutive quarters of negative growth. Rather it is determined by the Business Cycle Dating Committee of the National Bureau of Economic Research, a private non-profit research institution. The NBER looks at a variety of indicators, rather than following a mechanical two-quarter-GDP rule.
This comes as a surprise to most people. It is true that the rule-of-thumb of two consecutive quarters of falling GDP is used as the criterion for a recession in most advanced countries. But not in all countries.
In the US, the BEA officially recognizes the role of the NBER. It shouldn’t be that surprising. Private non-profit institutions also produce such important economic indicators as Consumer Confidence and the Purchasing Managers Index.
Consider an historical illustration of how it makes a difference. The NBER chronology shows a three-quarter recession in 2001, with the preceding expansion peaking in the first quarter (March) and the recession trough coming in the fourth (November). If one looks at a variety of indicators, employment in particular, it is clear that there was indeed such a recession. But the episode would fail the criterion of two-consecutive quarters, because negative GDP growth in the first and third quarters of that year was interrupted by a positive number in the second quarter.
It is natural to view growth in output as the most important indicator of whether there has been a recession. But even so, and even if one were wedded to the two-negative-quarters rule, it is important to realize that growth was not necessarily negative in the first quarter as people think it was.
There are two ways to measure output. The one that gets all the attention in the US is GDP measured “on the product side,” i.e., by adding up the sectors in which goods and services are sold, like consumption. That measure of GDP growth was indeed negative in the first quarter (-1.6 % per annum). But growth is also measured by GDI, which is calculated “on the income side,” i.e., by adding up kinds of income, like employee compensation. The two measures should be precisely equal, in theory. But in practice there is a statistical discrepancy. It was large in the first quarter. GDI showed a positive change in that quarter (+1.8 % per annum). The average of the two measures was positive. (The average of the two is sometimes called Gross Domestic Output.)
Here comes the important part. Experts, including those in the federal government, have for some time viewed GDI as just as informative in measuring economic output as the much more famous GDP. So has the NBER committee: “The dating of the quarterly turning point dates also considers the average of real Gross Domestic Product (GDP) and real Gross Domestic Income (GDI)”.
There are two implications for July 28. The first is that, even if reported GDP shows two negative quarters in the first half of 2022, the NBER committee is very unlikely to conclude that a recession started in the first quarter. Such a conclusion would be too much at odds with GDI, with the very strong growth in employment, and with most other economic indicators in January-March.
Second, the GDP numbers will soon be revised, as is routine. Revisions are substantial. The mean absolute revision for a given quarter, going from the third BEA release to final (i.e., after mid-year “benchmark revisions”) is 1.2%, for a sample ending in 2018. This is the main reason why the NBER committee waits so long – 11 months, on average – before calling cyclical turning points.
BEA undertakes a comprehensive mid-year “benchmark revision” of the National Income and Product Accounts. Apparently the results are to be released in September this year, instead of July. At that time, the revision of first-quarter GDP could well be upward, conceivably even by enough to turn it from negative to positive. The reason to think so is that revisions of GDP in the past have often moved it in the direction of GDI, more than revisions in GDI have moved it in the direction of GDP. (In that sense, GDI may be a more reliable measure of domestic output than is GDP.)
Thus, we could have a situation on July 28 where the public and the markets, responding to media headlines, think they have been told that a US recession began in the first half of the year, only to be told the opposite two months later.
 The average lag for the 10 turning points between 1980 and 2019 was 11.7 months. For the 2020 recession, it took the NBER BCDC 4 months to call the beginning and 15 months to call the end.
This post written by Jeffrey Frankel.
Looks highly reasonable.
Though Professor Frankel posts articles here often, it’s possible some readers are not aware of his research and teaching. Here’s some background:
Pretty well stated. Nice post, and putting a semi-complicated topic in terms laymen can understand. I am already on the record as believing the GDP number will be positive. And I guess if you force-fed me truth serum (damn it all anyway) I would admit I was referring to the “advanced 2nd quarter” number. But I reserve the right to claim I was “kinda right” if they change the numbers from negative to positive on the revisions.
“The announcemet is attracting more than the usual eager anticipation. The reason is that many observers predict that the Q2 GDP number will be negative and that this will officially confirm widespread beliefs that the economy went into recession in the first half of 2022”
I see Jeff has been reading the comments from the Usual Suspects. Nice job of summarizing the entirety of the data.
Now I would give the usual quip about Why do economists forecast? To make the weatherman look good.
But alas this will likely get CoRev barking about climate change.
I think I’ll just watch the headlines. Moreover, if we get the anticipated .75% Fed increase will make positive 3rd quarter numbers harder (maybe much harder).
Time will tell. What will voters be experiencing in November is the actual issue.
“I think I’ll just watch the headlines.”
That is so you. Reading the actual discussion is way over your MAGA brain.
You’ll just watch the headlines, because economic data doesn’t show the recession you want so much.
November is “the actual issue”? Ah, because you’ll happily trade millions of lost jobs for political gain. Good to know. It also lets anyone who hadn’t already caught on that everything you write is tainted with a partisan agenda.
He;ll watch the headlines, and when he sees the reported numbers he will proceed to divide them by zero. That will reveal the truth!
MD, speaking of partisan agenda, do you believe November is NOT “the actual issue”? And because you’ll happily trade >1T $ of annual personal spending losses due to Biden policy driven inflation for political gain. It might be we live in two completely different worlds, but in mine November has some influence.
You were asked to give a list of positive Biden policies. Nothing.
You were asked to refute that solar generated electricity would never fulfill peak demand. Again nothing.
You were also asked to explain how the “war on fossil fuels” hadn’t added significantly to inflation? Even again nothing.
I might be wrong on all three, but I don’t think so. I also don’t think the voters believe otherwise. Also by November we will have 3 quarters of 2022 economic data in the books, and whether we are in a “R” will be clear. November (THE NON-ISSUE) will tell us much.
Why pick on Macroduck? Others have answered your stupid questions multiple times. In fact, I have done so. Here we do it again.
Some Biden achievements? Highest private employment ever in US history, passage of a major infrastructure bill that GOP lawmakers who voted against it are now claiming credit for as the money rolls out. The ARP. Massively improving management of the Covid-19 pandemic over what his predecessor was doing, although will give Trump credit for helping getting vaccines get developed. Getting gasoline prices down recently. Getting US troops out of Afghanistan as well as 70,000 other people. Organizing global support for Ukraine against Putin’s war criminal invasion.
On the solar powere matter, batteries can store the solar power that maxes out a couple of hours before peak energy demand is reached. Just not a problem at all, despite your going on and on and on about it.
As for the war on fossil fuels causing inflations, sorry, but no. The more we can get off fossil fuels and lower the demand for them, the lower their prices will be.
You are jusr so terribly dumb.
thanks for the very insightful commentary. much more useful coming from somebody who has actually played in the game, rather than any commenter on a blog.
July 21, 2022
I Was Wrong About Inflation
By Paul Krugman
In early 2021 there was an intense debate among economists about the likely consequences of the American Rescue Plan, the $1.9 trillion package enacted by a new Democratic president and a (barely) Democratic Congress. Some warned that the package would be dangerously inflationary; others were fairly relaxed. I was Team Relaxed. As it turned out, of course, that was a very bad call.
But what, exactly, did I get wrong? Both the initial debate and the way things have played out were more complicated than I suspect most people realize.
You see, this wasn’t a debate between opposing economic ideologies. Just about all the prominent players, from Larry Summers to Dean Baker, were Keynesian economists, with more or less center-left political leanings. And we all had similar views, at least in a qualitative sense, about how economic policy works. Everyone in the debate agreed that deficit spending would stimulate demand; everyone agreed that a stronger economy with a lower unemployment rate would, other things equal, have a higher inflation rate.
What we had instead was an argument about magnitudes. The rescue plan was huge in dollar terms, and as Team Inflation warned, if it had a normal-size “multiplier” (the increase in gross domestic product caused by a dollar of additional government spending) it would lead to a highly overheated economy — that is, to a temporary surge in employment and gross domestic product far above their sustainable levels, and hence high inflation.
Those of us on Team Relaxed argued, however, that the structure of the plan would lead to a much smaller surge in G.D.P. than the headline number would suggest. A big piece of the plan was one-time checks to taxpayers, which we argued would be largely saved rather than spent; another big piece was aid to state and local governments, which we thought would be spent only gradually, over several years.
We also argued that if there were a temporary overshoot on G.D.P. and employment it wouldn’t sharply increase inflation, because historical experience suggested that the relationship between employment and inflation was fairly flat — that is, that it would take a lot of overheating to produce a big inflation surge.
So here’s the odd thing: The multiplier on the rescue plan does, in fact, seem to have been relatively low. A lot of consumers saved those checks; state and local government spending rose by less than one percent of G.D.P. Employment is still below its prepandemic level, and real G.D.P., while it has recovered to roughly its prepandemic trend, hasn’t shot above it.
Yet inflation soared anyway. Why?
Much, although not all, of the inflation surge seems to reflect disruptions associated with the pandemic. Fear of infection and changes in the way we live caused big shifts in the mix of spending: People spent less money on services and more on goods, leading to shortages of shipping containers, overstressed port capacity, and so on. These disruptions help explain why inflation rose in many countries, not just in the United States….
Krugman provides one of the rare honest discussions!
many opinion folks did a “I was wrong” column in the nytimes today. Krugman was a bit more honest in that endeavor than some of the other writers.
The spokesperson for Russia’s Foreign Ministry lashed out Thursday at the United States characterizing basketball star Brittney Griner’s jailing on drug charges as “wrongful detention,” saying it shows disrespect for Russian law.
I have no respect for anything with respect to Putin’s government. He is committing genocide in Ukraine. His government decided to make Brittney Griner a political prisoner. The charges are a trumped up joke and the criminal proceedings are a kangeroo court. She should be released NOW. To the Kremlin – eff you.
Oh dear. I also have no respect for anything with respect to Putin’s government. I also think they have decided to give Briner a max sentence with a clear plan to make her into a hostage/political prisoner, probably being set up to be traded for some Russian criminal the US holds.
However, I must confess I have not quite been fully sympathetic with people who are trying to turn this into the most important human rights case since the end of slavery, and that the US must set all other concerns aside to get her out. Why? Well, she did actually break the law. I gather she has a medical excuse for her cannabis use, but she should have known that this is not an acceptable excuse in Russia. Heck, cannabis remains illegal in much of the US, even for medical use.
I do recognize that she has also claimed that somehow or other this cannabis oil got into her luggae accidentally. If so, I have more sympathy. But, frankly, it looks to me that she just took it for granted she did not need to obey a well-known law because she is a big sports star. And it seems that is what she and her supporters are in fact counting on for getting her out (and I hope she does get out).
BTW, there has been a lot of huffing and puffing about her being put in a cage for the trial. But, in fact that is standard for prisoners there. On that one she is being treated like other people there, not that this is an admirable practice.
Would be fascinating to see your take on this if it was an age 55+ white guy. I don’t know, it would just be interesting if we could magically change the prisoner’s background into the same time event and see your reaction. Was it “smart” of Griner [ not Briner ] to be traveling there during this time period?? NO, it wasn’t very smart. But being a big dummy is not a felony crime last time I checked.
Sorry, a-hole, no difference. The issue is sports figures. Probably if 55+ white guy nobody would be doing anything because he would not be a current sports star. In fact, we have such a case, guy named Whelan. Have you heard of him? Are they ongoing press conferences about him? I am not dure he is over 55, but I know he is not a sports star. I also am under the impression that he actually did not break any Russian laws. His family keeps trying to get attention, but, hey, have you heard of him, Moses?
I should probably explain about Paul Whelan, since almost nobody here will have heard of him. He is not quite as old as you want, only 52, but he is a white male. A former Marine and vet of the Iraq War, he became manager of security for BorgWarner, an auto parts company based in Michigan that has had dealings in Russia. So he would visit there from time to time in connection with its business. He was in Moscow in December 2018 for a wedding and apparently met with an FSB guy. This led to him being arrested for espionage and he remains held by the Russians, having been sentenced to a 16 year term. There have been efforts to get him out through a trade, but has not happened yet.
That he is not a spy has been pointed out by people from CIA who note basically that they would not use somebody with an obvious military background and who did not have some kind of diplomatic cover. He is innocent, but a hostage pawn. But, even though in for much longer, not getting all the publicity the guilty as heck basketball star is getting.
I have checked. There are 17 states where one can get a jail sentence of 10 years or more for possession of marijuana. I grant that in all of these the amounts involved are more than a small container of hash oil as our poor basketball star got busted for in Russia. But in several of them the sentences can be for much longer than 10 years, even as I doubt anybody is getting these really lengthy sentences any more.
The top is for 99 yeats, unsurprisingly in Texas, although that is for more than 2,000 pounds of the stuff. But in Tennessee, one can get 30 years for a much more measly 10 pounds.
July 21, 2022
Chinese mainland records 200 new confirmed COVID-19 cases
The Chinese mainland recorded 200 confirmed COVID-19 cases on Wednesday, with 148 attributed to local transmissions and 52 from overseas, data from the National Health Commission showed on Thursday.
A total of 743 asymptomatic cases were also recorded on Wednesday, and 5,043 asymptomatic patients remain under medical observation.
The cumulative number of confirmed cases on the Chinese mainland is 228,180, with the death toll from COVID-19 standing at 5,226.
Chinese mainland new locally transmitted cases
Chinese mainland new imported cases
Chinese mainland new asymptomatic cases
July 20, 2022
Cases ( 91,767,460)
Deaths ( 1,050,702)
Deaths per million ( 3,161)
Cases ( 227,980)
Deaths ( 5,226)
Deaths per million ( 4)
It looks like real GDI shows a Y/Y change of 4.66% and real GDP shows a change of 3.53% for 20222Q1.
I can’t seem to get the FRED charts to link to multiple data series or to link percent changes. Maybe someone else knows the magic link.
2021Q2 real GDP was at $19,368 bn 2012 SAAR chained dollars. So even if 2022Q2 GDP dropped to $19,626 bn, (a drop from 2022Q1 to 2022Q2 of about 2.1% SAAR) there would be a Y/Y increase of about 1.3%.
Hard to believe that a positive Y/Y GDP increase would be considered a recession by NBER. Would a positive Y/Y change in real GDP be considered a change in the direction of the business cycle?
Biden’s first year did have strong economic growth. But don’t expect MAGA trolls like Bruce Hall to ever admit it.
But. but, that has brought us a terrible “worker shortage”! Eeek!
Those MAGA hat wearing RECESSION cheerleaders will likely get all excited at headlines that note that jobless claims rose (a wee bit). Before they go nuts, check out how these claims compare to where they were say 2 years ago:
Some of that was 4th rebound.
January 30, 2020
Gross Domestic Product and Gross Domestic Income, 2020-2022
January 30, 2020
Gross Domestic Product and Gross Domestic Income, 2020-2022
(Indexed to 2020)
January 30, 2018
Gross Domestic Product and Gross Domestic Income, 2017-2022
Chinese tanks protect branch banks from depositors.
As I have said, China is not a politically stable country and is coming to a crossroads.
Steven Kopits: While I am the first person to agree that China is not a completely stable country (if you’ve got to use mass repression by force and by information technology, I suspect it’s not fundamentally stable), I think you should (1) be careful to check your sources, and (2) think whether tanks are an effective way to protect banks (which then makes you go back to (1)).
So the Chinese army routinely deploys tanks in the middle of busy downtowns after dark? Really? That’s normal in China? Where are those tanks going?
Not what he said. Nobody is required to debate your made up nonsense.
I was there F’ing SEVEN goddamned years (most of them happy ones). I know what their sins are. This “tank” crap via 2022 is NOT one of them. Kopits is ass hat as it gets. I have enough “reason” to lash out at Chinese if I took a liking to lash out at them. Let’s blame them for what they are indeed guilty of. This Mumbai newspaper account of “tanks protecting banks” is not one of reality.
Let’s keep things reality based people/
China needs to become a normal democracy. The communist system is no longer sophisticated enough for a country at this stage of its development.
Yeah, but some “oil consultant” who resides only in blue states told us the villagers will throw Xi Jinping off the 6th floor terrace any day now. What are you worried about??
Kopits getting his best sourcing of China’s “inner workings” from a Mumbai newspaper. Kind of reminds me of a Virginia idiot who said his “insiders” with Putin told him “no invasion of Ukraine”. Good times…… Mountain Pie Supper at Barkley’s house this Saturday. Bring your banjos.
Sorry, Moses, no supper at my place this weekend. I am still recovering from Covid-19.
Maybe Mountain Pie is a home remedy. Eh, you’re like Biden you got your immunity shots. You’re way way way too annoying for even a virus to make a long-term home in. Even Covid is gonna be like “What?!?!?!? He’s got a PhD and he thought the Russian soldiers were playing Uno and Twister on Belarus southern border!?!?!?!? What a creeper, let’s get the hell out of this windbag before he gives us the Moscow strain of HPV!!!!
I guess you do not know that Putin had sent troops to the border in large numbers several times previously, engaging in exercises while Putin made threatening noises. But in those previous cases he wirhdrew them after some time. It is pretty clear that the Ukrainian leadership figured this would be like those earlier times, even though there more troops this time, and the CIA was saying they would invade. But, as has been pointed out several times here, CIA has gotten things wrong in the past with public statements.
Indeed, I did report at a point and believed it that Putin was withdrawing the troops at the end of the exercises, something believed by the Ukrainian leaders and parents of soldiers involved, as well as, reportedly, the soldiers themselves. But I immediately changed my mind when Lukashenka said they needed to stay in Belarus to defend it from a Ukrainian invasion. New information, I changd my view.
You, OTOH, while correctly believing the CIA forecasts, had your own bungles. The obvious one in connection with all this was you somehow deciding Russia had troops in “southeast Romania” that were going to be invading Ukraine. I had to explain to you that they were not part of all these exercises and were actually in the separatist TRansniestria Republic carved out of Moldova, where they have been for 30 years, and that they would not be part of any invasion that might happen, and that has proven to be the case. You also managed to get Kherson and Kharkiv confused at one point, and made a string of other mistakes of varying degrees of egregiousness.
Whereas I quickly adjusted my view when new facts appeared, you persist in all sorts of nonsense, most recently continuing your bizarre claims that Ulenspiegel is Russian and lt is male, claims unsupported by anybody here. Have fun in the intellectual basement.
Dude – this was pointed out days ago. But yea – you are too damn arrogant to read anything beyond your insane bloviating.
——- tanks protect branch banks from depositors.
[ This is of course false and racially malicious. ]
—– is not a politically stable country and is coming to a crossroads.
[ This is of course false and racially malicious. ]
ltr: Even if protests were not suppressed with the aid of armored vehicles, the authorities’ response seems bad enough as it is.
That’s how such rumors can start, not because they are necessarily true, but because they are plausible. Uprisings can start the same way, for instance, because people believe the government has sent tanks to prevent depositors from getting their money, not necessarily because it is true, but because it is consistent with other government behaviors observed by the public.
Still not clear what the tanks are doing there, wherever they are. Some reports suggest that they are naval tanks going to a naval base 50 km away. That’s pretty bizarre. In any event, if anyone knows why sending tanks through the middle of a city at night makes sense, I would welcome the insight.
It seems that China’s economy is built on a real estate Ponzi scheme, and when that ends, there will be a major reset in China.
“That’s how such rumors can start, not because they are necessarily true, but because they are plausible.”
That from the troll that spews implausible BS as if it were gospel.
—– needs to become a normal democracy.
[ This is of course false and racially malicious.
This is the result of having been systematically taught for years and years a racial disdain for 1.4 billion of the world’s people. ]
ltr: Even if protests were not suppressed with the aid of armored vehicles, the authorities’ response seems bad enough as it is.
Can imagine ltr and Princeton Steve on a date since he hates all things Xi whereas she praises all things Xi. Could true love ensue/
but ltr can throw racially charged threats at others in an attempt to bully them into silence, and that is alright? ltr, you are a hypocrite and a bully.