Summer’s End Is Ushering In a Recessionary Chill

When future economic historians write of our times, the thrust will be that it was a time of transition. Generational changes are taking place in labor markets; rapidly changing technology threatens to disrupt everything; there’s a strong political push to restructure the energy sector for environmental reasons; and we face unprecedented peace-time fiscal imbalances and an exceptionally fluid international situation. “Post-pandemic” will take its place alongside the “post-war” and “post-Cold-War” modifiers in describing events.

The immediate consequence of this is widely divergent economic indicators that make it hard to discern economic trends. Since President Biden took office, it’s possible to spin the numbers as a golden age of Bidenonomic prosperity, or as a stagflationary disaster to rival the 1970s. To maintain partisan claims, both sides have had to change their stories.

For the first 30 months of the Biden administration, the supply side of the economy looked strong with rapidly growing industrial production and employment; but the demand-side indicators of economic health — gross domestic product, personal income and sales — were falling, and inflation seemed poised to get out of control. Administration spokespeople sounded like Reaganite supply-siders, and Republican critics like Keynesians.

A flashpoint dispute in the summer of 2022 occurred when the National Bureau of Economic Research refused to call a recession, despite two successive quarters of declining GDP. The NBER cited strength in employment and production, and that gross domestic income was not falling. Republicans claimed Democrats were changing the definition of a recession to avoid telling people the bad news. The White House countered that two successive quarters of GDP decline had never been the official definition of a recession, merely a common rule-of-thumb.

In the third quarter of 2022, everything changed. Inflation began to fall and sales increased while personal income and GDP stopped declining. Employment gains continued and industrial production continued to grow, albeit at a slower rate. But now GDI — perhaps the major reason the NBER did not call a recession in 2022 — began to fall, with two successive negative quarters. GDI is now an all-time-high $379 billion less than GDP on an annualized basis (the percentage difference has been higher in the past, however). This is concerning because GDI is the more reliable recession predictor than GDP.

In theory, GDP and GDI measure the same thing — the total value of goods and services produced in a geographic area and sold to end-users at arms-length prices during a quarter — but in different ways. If the economy had a single cash register, GDP would measure the money coming into the till, GDI would measure where the money went — to wages, supplies, taxes, interest, dividends or left in the till for owners and stockholders. But since the economy has billions of transactions, many complex and not all captured in official numbers, GDP and GDI have different measurement errors, and thus different values. They’re usually pretty close, however, differing by 0.8% on average.