Is the US in a recession or not? The debate grows

On both sides of the Atlantic, major economies have been hit by a slowdown in economic activity for several months as a result of the war in Ukraine, which has pushed up prices. While American GDP contracted for the second straight quarter, the United States has entered a recession, yes or no? The White House and the US Federal Reserve insist this is not the case. US President Joe Biden goes so far as to insist that the US economy “ on the right way “. On this side of the Atlantic, too, fears of the eurozone sliding into recession are growing.

How about? Is the US in a recession? When is an economy in recession? The grandstand takes stock.

Above all a question of definition

According to accepted theory, a recession corresponds to a decline in a country’s real (inflation-adjusted) GDP for two consecutive quarters. In the United States, GDP fell an annualized 0.9% (or 0.2% if we simply compare quarter-on-quarter) for the April-June period, according to an initial estimate from the Commerce Department released Thursday, after falling 1. 6% in the first quarter. Technically, therefore, we can conclude that the United States has entered a recession.

But it’s not as simple nor as mechanical as it seems. ” The general estimate is more complex than that ‘ she explains The gallery Laurent Ferrara, in charge of the Committee for Dating the Economic Cycle of the French Association of Economic Science (AFSE), the French equivalent of the National Bureau of Economic Research (NBER) in the United States, an organization authorized to officially determine recessionary periods .

The DAD rule

Really to consider that a country is in recession” Three criteria must be considered ‘ says Laurent Ferrara. Knowledge, ” the duration of the phenomenon »: at least two consecutive quarters, ie more than six months. Next ” its amplitude »: Growth has to fall by 3 or 4% for an economy to be considered in recession. This was the case in France in 2008 and in the 1970s after the oil shocks. While the debt crisis of 2012, which caused GDP to fall by just over 0%, is not considered a recession. Third factor to consider: the widespread throughout the economy “.” For France, for example, we also look at the labor market, business investment, hours worked, which give an indication of economic activity “, he specifies. ” We also check whether a shock affects the different sectors of the economy. Services and industry in particular are monitored adds the economist. In the jargon of economic analysts, this means ” the DAD rule for ‘duration’, ‘amplitude’ and ‘diffusion’”.

A definition consistent with that of the NBER, the organization considers “ the official arbiter of recessions ” in the US. The National Bureau of Economic Studies defines a recession as ” a significant drop in economic activity that spreads across the economy and lasts more than a few months, usually visible in output, employment, real income, and other indicators.”

Historically low unemployment

However, when in the United States the risks of a downturn in the American economy are increasing – as shown by the slowdown in housing starts and home sales or even the business climate and household confidence, which have deteriorated in recent months – other indicators remain positive and therefore put into perspective the fact that the country is in recession.

Consumption, the driving force behind the American economy, surprised again in June with its momentum. Even if, in the event of inflation, households leave with a less full basket for the same bill. Last but not least, another positive indicator: the labor market in the United States is doing well. At 3.6%, the unemployment rate is very close to the pre-crisis level, the lowest level in 50 years. And employers are still struggling to hire new employees.

A very political debate

This is enough to console the American President, who even insists that the current situation ” doesn’t look like a recession to me “. And his Treasury Secretary, Janet Yellen, added that the American economy has stayed put robust “, even if they ” slowed down “. Very political statements in the run-up to the midterm elections on November 8th. Joe Biden is actually trying to reassure Americans who will decide whether the President’s Democratic Party will retain control of Congress. The opposition sees this as an attempt to manipulating numbers.” Scoop for Joe Biden: You can’t change reality by arguing about definitions ‘ the Republican Party responded.

By reiterating that the United States is not in a recession, Washington is also defending its monetary policy. To curb inflation, Americans started raising interest rates a few months ago. ” In the event of a recession, the US Federal Reserve would be forced to cut interest rates to inject liquidity into the financial system. However, this is the complete opposite of what they are currently doing. Since the strong post-Covid recovery, the United States has been in a period of normalizing its monetary policy, they don’t want to go back. They think they’ve had low interest rates for too long ‘ explains Laurent Ferrara.

Europe more exposed to recession risk

Caution is advised, but this observer of economic cycles agrees nonetheless“Right now we cannot speak of a recession in the United States from a macroeconomic perspective. Especially since they are energy self-sufficient and less prone to crises than Europe and France. However, if activities in Germany are halted, there is a serious risk that the eurozone will enter a recession.”.

At the moment, the French economy appears to be holding up well. France, whose INSEE this Friday published a first estimate of GDP for the second quarter From April to June, the country even returned to growth and recorded a more dynamic than expected recovery in GDP, which rose by 0.5%. In the first quarter, it had experienced a 0.2% decline. Technically, the French economy is not in recession. Still, Laurent Ferrara warns, we must remain cautious. The analyst states that it will be too early and technically impossible to make any statements as long as it is a first estimate. “Given the high level of inflation, we are awaiting confirmation of the figures from INSEE. But we expect a lot of revisions », adds the economist, also pProfessor at SKEMA Business School.

Right now, like in the United States, growth swings are not very large compared to periods of recession. In addition, employment in France is developing well in the United States. The unemployment rate fell further in the second quarter. “We are not in a recession as long as employment is against trend and business investment is good », emphasizes Laurent Ferrara. A trend that could, however, be reversed. Indeed, France could slide into recession, particularly if inflation persists, if recruitment difficulties – affecting many industries – persist and if supply difficulties (in logistics and commodities) continue to weigh on the economy. Another factor to consider: If the German economy, which is heavily dependent on Russian gas, slows down sharply, the entire eurozone could slide into recession.