Real gross domestic product (GDP), which is the inflation-adjusted final value of all goods and services produced in the United States, declined by 0.9% in the second quarter after declining by 1.6% in the first. Two consecutive quarters of GDP decline is the definition of a recession found in any “introductory economics” textbook, despite the attempts by some to redefine the term. Since the end of World War II, a recession has been called by the National Bureau of Economic Research’s Business Cycle Dating Committee every time the economy has contracted for two consecutive quarters. Consistent with the traditional definition of a recession and past practice, the economy is in a recession.
Some argue that the strong July jobs report and the unemployment rate being at 3.5% means the traditional definition of a recession no longer applies. This argument misses some key points. First, jobs reports have been strong at the onset of a recession as employment lags the broader economy. December 2007, the first month of the Great Recession, saw over 100,000 new jobs created. Second, the economy only just returned to February 2020’s employment level. Had the 2020 shutdowns not occurred, employment would have likely continued to grow by approximately 150,000 jobs per month leading to four million more jobs over-and-above our current level. Third, inflation-adjusted wages have fallen in 2022. Wages are up by 5% but inflation is 9%, meaning workers’ purchasing power has fallen by 4%. If the economy contracted for two consecutive quarters, lost four million jobs and saw wages fall by 4%, a recession would be undeniable. However, for all intents and purposes, this is where the economy is right now.
Two common causes of recessions are sharp increases in the price of crude oil and the Federal Reserve tightening to reduce inflation. Both have preceded nearly every post-World War II recession and both have occurred at severe levels in 2022. Interest rates have doubled and crude oil is up by nearly 50%. Both were avoidable problems and consequences of negligent economy policy during and post-pandemic.
When businesses were forced to close, people’s jobs and businesses were destroyed. Rather than reversing course when it became apparent that the shutdowns were not flattening the curve, policymakers doubled down, extended shutdowns into 2021, and tried to backfill the loss by printing trillions of new dollars and pouring them into the economy through three rounds of COVID “stimulus” spending. It should not surprise anyone that financing massive increases in government spending through doubling the money supply led to inflation, but apparently it surprised policymakers, Federal Reserve officials and some academic economists. U.S. foreign policy has made no effort at peace negotiations in Ukraine and instead have poured billions of dollars worth of weapons into the conflict, destabilizing world oil and food markets and risking broader geopolitical conflict.
Americans have been through a lot over the last two years and deserve to be in a better place in 2022.