We Have a Recession

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It seemed to go without saying, but on Monday June 8th, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) made it official: The U.S. economy entered a recession in February 2020. It marked the end of the longest expansion in the nation’s history, lasting 128 months.

The official designation of a recession came with unusual swiftness. Many months often pass before the NBER can date when a contraction of the economy has set in. The last recession, for example, began in December 2007 but was not officially recognized as a recession.

As explained by the NBER, “[I]n determining the date of a peak in activity, and thus the onset of recession, we wait until we are confident that, even in the event that activity began to rise again immediately, we feel confident that a recession has occurred. As a result, we tend to wait to identify a peak until a number of months after it has actually occurred”

This time the NBER was able to pinpoint the onset of a recession more quickly because the drop-off in economic activity was unusually sudden and deep, reflecting the unusual circumstances surrounding the COVID-19 pandemic. As business shutdowns and stay-at-home orders were issued around the nation, economic activity fell off a cliff. 

The committee noted that “the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.”

A number of factors are used by the NBER in determining whether a recession has taken hold. No one factor is determinative, however, the committee views real gross domestic product as “the single best measure of aggregate economic activity.” In addition, the committee “also considers carefully total payroll employment as measured by the Bureau of Labor Statistics.” 

How long the current recession will last, or whether it may already be over, is a matter of great uncertainty. The NBER statement did not speculate on how deep or how long the recession might be.

Recent data and projections show mixed signals. First quarter real (inflation-adjusted) GDP growth in 2020 (January-March) was down by 1.2 percent from the fourth quarter of 2019. The Congressional Budget Office (CBO) projects that it will be down by 11.2 percent in the second quarter of this year before rebounding by 5 percent and 2.5 percent respectively in the third and fourth quarters. For the year, CBO projects a decline of 5.6 percent.

The Federal Reserve Board issued a more pessimistic outlook on June 10th, projecting that real GDP would decline by 6.5 percent for the full year in 2020.

More pessimistic yet is a new report from the Organization for Economic Co-operation and Development (OECD) projecting a 7.3 percent decline in U.S. real GDP in 2020, providing there is no second outbreak of the virus causing a new round of business closures and lockdowns. If a “second wave” breaks out, the OECD projects that the decline would be 8.5 percent.

On the jobs front, the Bureau of Labor Statistics recently reported that 2.5 million jobs were added in May following a catastrophic loss of 20.7 million jobs in April. The unemployment rate ticked down from 14.7 percent to 13.3 percent, a level still higher than at any point during the Great Recession. This, combined with projections for a recovery in real GDP growth over the second half of the year, provide some hope that the recession will be a short one. 

A short recession, however, would not necessarily mean a strong recovery. Many jobs may be permanently lost and the dampening effect of social distancing as the COVID-19 disease lingers without a reliable remedy or vaccine may prevent the economy from rebounding quickly. According to the CBO, it could take another 10 years for the economy to regain lost output from the pandemic.

Meanwhile, federal actions to combat the pandemic have begun to make a major dent in the budget. Last week, the CBO reported that the budget deficit for May was $424 billion, an amount that is $266 billion higher than in May of 2019. For the first eight months of the fiscal year, CBO reported that the budget deficit was $1.9 trillion, up by more than $1.2 trillion from the first eight months of 2019. For the full year, CBO is tentatively projecting a deficit of $3.7 trillion.

The path ahead is quite uncertain, but one thing we now know for sure: We have a recession.

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