What defines a recession? For many economists, the answer is relatively straightforward. Historically and technically, a recession is defined by two consecutive quarters of declining gross domestic product (GDP). On Thursday, however, the White House issued a statement to the contrary. Ahead of this week’s second-quarter GDP data release, the White House is redefining what constitutes a recession.
In a July 21 blog post, the White House claims the historical GDP-barometer of a recession is outdated:
“While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle. Instead, both official determinations of recessions and economists’ assessment of economic activity are based on a holistic look at the data.”
The White House argues that modern economic institutes define and value a recession in different terms. Citing the National Bureau of Economic Research (NBER), variables like “real personal income minus government transfers,” consumer spending, employment and industrial production are apparently a more accurate measure of economic activity.
So, President Joe Biden and his administration claim that a more holistic view of the economy largely disproves any recession claims. Unfortunately, though, many economists and financial operators are now weighing in. Not all of them favor the reframed recession conditions.
What Defines a Recession? White House Jumps on Defensive Ahead of Q2 GDP Data
To some, this latest White House missive seem like damage control ahead of the likely underwhelming GDP report. Right now, most predictions forecast yet another quarter of falling production. The Atlanta Federal Reserve’s latest GDPNow estimate places Q2 GDP down about 1.6%. That’s the same drop as in Q1 2022.
Michael Burry, the notorious investor who earned billions by shorting the housing market, believes this latest blog post is indeed an effort to reduce blowback ahead of Thursday’s GDP report. Today, Burry suggested the White House is ignoring tell-tale indicators and redefining what merits a recession in order to reduce fear.
The White House would like you to redefine a recession as one in which consumers are not borrowing on credit cards to pay for inflation, and neither is the labor force inadequate for the size of the economy. GDP out Thursday, not that there's anything wrong with that. pic.twitter.com/dltad0klaC
— Cassandra B.C. (@michaeljburry) July 25, 2022
Burry argues that the Biden administration mistakenly believes that economic bright spots, like unemployment and consumer spending, lowers the possibility of a recession.
Perhaps unsurprisingly, Biden has reiterated the strength of job growth in recent months. In June, employment rose by 372,000 while maintaining a roughly pre-pandemic 3.6% unemployment rate. According to Burry, this is more so a reflection of a shrinking labor force.
However, in Biden’s defense — even considering labor force participation — job growth has been climbing. It’s more than three times higher than in “any three-month period leading up to a recession.”
Are We in a Recession or Not?
Under ordinary conditions, production should always ramp up over time. This intuitively makes sense; as the population grows, it’s only natural to see the amount of goods produced grow, reflecting a healthy economy. When the country experiences a decline in gross production, it typically reflects a fall in consumer spending often associated with wider economic deterioration. Declining wage growth and a contracting money supply often accompany negative economic growth.
That isn’t to say that the White House’s argument is completely without merit. Recessions are multifaceted phenomena that affect consumer behavior across a number of important metrics. Viewing GDP as the end-all-be-all would be turning a blind eye to things like business-to-business activity, real income and more.
The NBER committee itself — which makes the official recession call in the U.S. — found that Q1’s 1.6% GDP drop was largely attributable to things like falling inventories and a change in net exports. These function more as reflections of a turbulent global macroeconomic environment than domestic deprivation.
Heading into the week, GDP is on the minds of economists and analysts everywhere. How the market responds to the famous recession indicator — and decides what defines a recession — remains to be seen.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
