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The Line: Let the Recession Debate Begin

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.



Last Week, the Commerce Department announced the U.S. economy contracted at a 0.9% annual rate in the second quarter. Put that together with the 1.6% decline in the first quarter, and you have two straight negative quarters of GDP growth. That’s important, as many economists consider that the definition of a recession. If only it were that easy. While the two-straight quarters definition was the standard for a long time, that has changed over time. Meet the National Bureau of Economic Research. The NBER are the "official" arbiters of when recessions occur. Their definition is "a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months." Leave it to economists to answer an important question with a vague answer. You can read more about the eight economists at the NBER who make these decisions here. Why don’t I have that kind of power? These two methodologies are not mutually exclusive but do lead to many arguments. Some of these are political, but in this case, there are some good points on both sides. For me, what makes it hard to call a recession right now is the strength of the labor market. How can you have a recession when the unemployment rate is near a 50-year low, and we are adding an average of 457,000 jobs per month this year? This is also why I don’t think you can say we are experiencing stagflation right now. To have stagflation, you need little or no economic growth, rising prices, and high unemployment. To quote Meat Loaf, "two out of three ain’t bad," but it doesn’t add up to stagflation. So, let’s stick with what we know for sure, and that is:

  • Inflation is still way too high

  • Consumers are tapped out, and are cutting back on spending

  • The labor market has remained strong, which is really the only good news here

Whichever definition of a recession you want to use—I personally like the "I know it when I see it" one—you have to agree the economy is softening, and will remain weakened as the Federal Reserve continues to raise rates to bring inflation under control.


Speaking of the Fed, that brings us to our next headline.


The Federal Reserve Hikes Rates by 0.75% for the Second-Straight Time



Last Wednesday, the Fed announced a second-straight 0.75% increase in short-term rates. This wasn’t much of a surprise, although a 1% hike seemed possible after the scary inflation data for June.


While the Fed acknowledged the softening of the economy, Chairman Powell stated at his press conference that he doesn’t believe we are in recession. I wonder if he changed his mind after reading last Thursday’s GDP report.


I’ve spoken a lot in this column about how the Fed’s actions impact interest rates, so I won’t get into that today. But as a public service, here’s an article about five rates that will go up soon. I will also remind you that even though we have the worst inflation in over 50 years, mortgage rates remain historically low.


Don’t believe me? Well, maybe you’ll believe my good friend FRED. No, not Fred Peters (Hi, Fred!); it’s the St. Louis Fed’s awesome data tool, "Federal Reserve Economic Data."



As they usually do, the Fed said in their statement that future rate decisions will be based on data. If that’s true, I would expect another rate hike—although not as big—at their next meeting in September, as I don’t see inflation coming down by then.


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