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The Big Economic Question – The New York Times

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The latest GDP data suggesting the economy has contracted in each of the past two quarters has intensified the debate over whether the US economy has fallen into recession.

Today’s newsletter briefly explains this debate. But I also want to explain why some of this reasoning is semantic and not particularly relevant to most Americans. The more important question is simpler: Will the economic problems worsen in the coming months, or will the situation stabilize and perhaps even improve?

This issue has tangible implications for people’s lives. This can influence your decisions about whether to buy a house or a car, whether to look for a new job, and whether to become more careful with your spending. There is no clear answer, but there is useful information.

It helps to start with the basic structure: the decision makers of a country’s economic policy. want the economy will weaken, but not too much.

The main economic problem in recent months has been an overheated economy, with demand for goods exceeding supply, leading to the highest inflation since the early 1980s. To bring down inflation, the Federal Reserve raises interest rates, which forces families to spend less money and, in turn, causes prices to stop rising so quickly.

“We have high inflation and historically high inflation,” Cecilia Rose, chair of the White House Council of Economic Advisers, told me and other reporters yesterday. “In order to bring down inflation, we understand that the economy has to cool down.”

But Fed officials have a hard time finding the right balance. They’re trying to force spending cuts big enough to bring down inflation, but not cuts big enough that companies cut jobs, unemployment rises, and the economy goes into a vicious circle.

When people talk about the economy going into recession, the main question is whether this vicious cycle is starting. So far, it doesn’t seem to have done so. However, the risks for the remainder of 2022 are significant.

There is no single definition of a recession. One unofficial definition is two consecutive quarters of contraction in gross domestic product (a measure of the output of an economy). With yesterday’s GDP report, the economy lived up to that standard.

However, most economists do not like the definition of two quarters. They consider it too narrow because it is based on a single economic indicator. Any indicator, even GDP, can sometimes be misleading.

Right now, GDP may be exaggerating the economy’s troubles for several technical, temporary reasons related to global trade and corporate stocks, said Mark Zandi, chief economist at Moody’s Analytics. Another broad measure of the economy, known as gross domestic income, has not declined in recent months and tends to be less volatile than initial estimates of GDP (yesterday’s figure was an initial estimate, and the government will revise it – perhaps even to a positive number – as it comes in). additional information.)

The volatility of initial GDP numbers is the reason why economists usually prefer a different definition of a recession. National Bureau of Economic Research, a private non-profit organization, appoints a small standing committee of academic economists who make statements that many other experts consider to be official. The NBER defines a recession as a significant, sustained, and widespread decline in economic activity, and committee members typically wait months until enough data is available to declare a recession has begun.

(My colleague Ben Kasselman wrote a good explanation of recession definitions this week.)

One major reason to doubt that the economy is already in recession is the strength of almost every indicator other than GDP, such as consumer and business spending, which are still rising, as is employment. “It’s hard to understand how we survived a recession in the first half of this year when the economy created so many jobs, unfilled positions were at an all-time high and layoffs were close to an all-time low,” Zandi said.

As you can see in this chart compiled by my colleague Ashley Wu, the last few months in the labor market bear little resemblance to other recent recessions:

There is one caveat: professional economists are almost always too late to recognize the onset of a recession. Why? They make judgments based on late data and, like other people, are prone to irrational optimism.

Historically, when economic forecasters said there was at least a 30 percent chance of the next recession, it meant that a recession was actually more likely than not. I used to call this number worrisome index. Now what? About 44 percent, according to the latest Wall Street Journal poll of forecasters. The anxiety index flashes red.

“Are we in a recession? We don’t think so yet. Will we be in one? It’s a high risk,” Joel Prakken, chief economist at S&P Global Market Intelligence in the US, told Ben Kasselman.

The Fed’s interest rate hike — combined with high energy prices caused by Russia’s invasion of Ukraine and continued Covid disruptions around the world — created a significant chance for a vicious cycle of spending cuts and job cuts. The Fed, of course, still hopes to avoid such an outcome and achieve a so-called soft landing in the form of lower inflation and continued economic growth. But, as Michael Feroli, an economist at JP Morgan, told my colleague Jeanne Smialek, “the degree of complexity has probably increased.”

This is a strange moment for the economy. On the one hand, GDP figures seem to exaggerate the weaknesses of the economy over the past six months. On the other hand, there are legitimate reasons to be concerned about the economy in the next six months.

Kyler Murray’s homework cancelled: Cardinals controversial point removed — which caused outrage among fans and experts — because of the new contract of their star quarterback.

Renaissance, Beyoncé’s seventh solo album, is here. Unlike the lead up to her recent releases, this one was oddly traditional: She announced the album ahead of time and released “Break My Soul,” a single inspired by 1990s dance music. She even joined TikTok.

Beyoncé’s previous out-of-the-box approaches, including surprise visual albums and exclusive deals with streaming services, have alienated her slightly from the mainstream commercial market. Her last No. 1 single was “Single Ladies” in 2008, despite her ongoing prestige.

“She’s still a cultural leader,” music journalist Daniel Smith told The Times. “There are people who exist in this world to change the culture, to change the atmosphere.”

For more: The album is the first of three projects she created during the pandemic. And critics and Times reporters are debating which Beyoncé album is the final one.

The pangram from yesterday’s spelling bee was avalanche. Here is today’s riddle.

Here’s today’s mini crossword and clue: You are here (five letters).

And here is today’s Wordle. After that, use our bot to get better.


Thank you for spending part of your morning with The Times. See you tomorrow. – David

PS Gilbert Cruzwhose cultural recommendations are published in The Morning on Saturdays, will be the next editor of The Times books.



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