What Constitutes a Recession? It’s More Complicated Than You Think

So did the U.S. just enter a recession? It depends on who you ask.

As you no doubt heard, U.S. real gross domestic product (GDP) retreated for the second consecutive quarter, falling 0.2% in the June period after a decline of 0.4% three months earlier.

For many people, this is a clear indicator that the country is in recession.

But according to the committee that’s responsible for making the official call on what constitutes a recession, it’s more complicated than that.

That committee is the Business Cycle Dating Committee, part of the U.S. National Bureau of Economic Research (NBER). Way back in November 2001, the eight-member group of economists sought to clarify how it defines a recession. Interestingly, the members said that they give “relatively little weight to real GDP because it is only measured quarterly and is subject to continuing, large revisions.”

So if not GDP, what do they look at?

Employment and Wages Are Up, but Business Conditions Contracted in July

In the committee’s eyes, a recession is “a significant decline in activity spread across the economy.” This decline, it adds, is “visible in industrial production, employment, real income and wholesale-retail trade.”

Some of the areas mentioned above are strong right now, while others are clearly slowing.

On the plus side, the U.S. jobs market remains robust, and wages and salaries continue to grow. In the second quarter, the employment cost index (ECI), which measures total compensation for private workers in all industries and occupations, rose 5.5% compared to the same quarter last year. Although the increase is not enough to keep up with inflation, it’s a healthy jump, nonetheless.

On the other hand, business activity appears to be slowing. The preliminary reading of the overall U.S. business market shows that conditions deteriorated in July. The Flash U.S. PMI Composite Output Index, which combines the services and manufacturing industries, came in at 47.5, the first contraction since June 2020. The only part of the economy that reported expansion in July was manufacturing, which recorded a 52.3.