For weeks, headlines and on-air pundits have been debating whether or not the US is in a recession right now, especially after real GDP for the second quarter showed a second consecutive decline. While interesting, none of those debating the issue actually determine when we are officially in a recession. Who does, you ask? Read on to find out.

Primers on Recession

Here are two good resources that explain what a recession is beyond the “two consecutive quarters of GDP contraction.” The first is an interactive post on recession from the Washington Post Econ 101 series (subscription may be required.)

If you would like to go more in depth, the Morning Brew has a 9+ minute YouTube video on the subject. Another good option coming in at 5 ½ minutes is a Yahoo U video, also on YouTube.

Headlines

The gist of the articles listed here is that the economy is full of mixed signals. We may have had two consecutive quarters of real GDP decline, and many are anticipating an inflation, but it doesn’t feel like we are there yet, and people aren’t really acting like we are in a recession. Consumers are still spending money, despite inflation, and July jobs came in at twice the expected number.

The AP looks at the “mixed signals” in the following measures:

• Economic Growth
• Consumer Price Index
• The Unemployment Rate
• US Manufacturing
• Home Construction

Quartz highlights five paradoxes in today’s economy that make it so confounding.

• We are at full employment but real GDP has contracted, and GDI (Gross Domestic Income) is diverging from GDP (they normally are in sync), which adds to the confusion.
• The Fed has raised interest rates four times, but credit has recently eased some.
• Consumer confidence is low, but consumers are still spending money.
• CEOs are worried about inflation, but investors do not appear to be as concerned.
• Gas prices have been dropping for a while now, but inflation has not.

Focusing more specifically on GDP itself, these next two articles try to explain why real GDP has dropped, and who is feeling it.

Morningstar digs deeper into the GDP report and the breakdown of the quarterly numbers by sector of the economy to conclude we are not at such a high risk for a big recession. They project that this past quarter’s drop in GDP was statistical noise.

The Overshoot asks the question “Did GDP really decline?” and takes a closer look at that GDP/GDI divergence as well as the Bureau of Economic Analysis of the drop in GDP

Who Makes the Recession Call?

The call falls to eight economists from the National Bureau of Economic Research, specifically, the “Business Cycle Dating Committee.” While the textbook definition of two quarters of real GDP decline has been met, the NBER looks at the depth, diffusion, and duration of an economic decline. (This is from the NBER’s helpful FAQ on the topic.) Every so often, one factor’s decline may be so rapid and steep as to be sufficient evidence of a recession. The most recent example of that would be at the beginning of the pandemic.

The Committee may not make the call until months after the fact. While they may be feeling political pressure from outside the organization, and while current conditions may make the call more complicated, the Committee won’t be rushed. What do they consider beyond GDP, you may ask?

The general impression many Americans — and some commentators — have is that a recession is defined as two consecutive quarters of negative economic growth. But that is not how the NBER, or most economists, think of it. Instead, the committee weighs factors such as payroll levels, retail sales, industrial production and personal income when making a comprehensive assessment about whether the economy is in recession. The committee stresses on its website that “there is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions.” (WAPO-subscription may be required)

Lesson Ideas

1) Assign a primer article or video, if necessary for more background information.

2) Divide the class into two groups and assign each group one of the first two articles about mixed signals, and one of the articles about GDP. Then make pairs of students with one from each group to tackle the following:

1. a) Share at least two of the main points you understood from each article your read with your partner.
2. b) Keep track the common points made in the articles and note any unique
3. c) After this exercise, do you and your partner agree on whether or not we are in a recession yet?

3) Have all students read the WAPO article on the NBER’s Business Cycle Dating Committee (or provide the summary above), and review the NBER’s FAQ about them. Divide the class into groups of eight (four of the pairs) to form a classroom version of the Committee. Have them review what they have learned from their reading and conversations in pairs, and as a committee, determine if we are in a recession yet. Groups should report their conclusion, reflect on how difficult it was to come to a consensus, and discuss which economic data they are most concerned about worsening to the point where we would be in a recession.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.