You would never know from the headlines, but we are not in a recession.
Last week, Time proclaimed that “the recession is not over and is about to get a lot worse for some.” USA Today said that “efforts to pull the economy out of recession pose a risk of financial crisis.” The San Jose Mercury News warned that “the coronavirus recession could cause long-term damage to the California economy.”
So it’s jarring to hear Fed Chairman Jerome Powell say, as he did today, that “the recovery has progressed faster than expected” and those projections at last month’s meeting of the Federal Open Market Committee.
Recovery? Solid rhythm? With initial jobless claims from the last week still more than three times higher than just before the pandemic? What data on the planet is the Fed analyzing?
In fact, Powell is right, as are the rest of us. Understanding how economists speak helps explain why they say there is no recession and why ordinary civilians feel we are in a bad time.
For an economist, the term “recession” does not refer to the level of economic activity, but only to the direction of change. Until March, the leadership was increasing. The economy was growing at a moderate rate; that’s an expansion. Then came the coronavirus in a big way; much of the economy shut down and GDP fell 31% in the second quarter. That is the beginning of a great recession. If it lasted long enough, we would call it depression, a less formal term among economists.
But, exceptionally in the economic history of the United States, it did not last long. When companies reopened and Washington injected about $ 3 trillion into the economy, activity began to pick up. Consumption of goods has recovered and business investment is increasing. For an economist, that change in the direction of economic activity, from sinking to rising, is the end of a recession and the beginning of a recovery.
For a non-economist, a recession is not about a direction of change; it’s about how bad things are and how bad they continue. The official unemployment rate, 7.9%, is below its April peak, but it is still higher than it has been in almost eight years and almost double what it was before the pandemic. The official rate underestimates the suffering because millions of people have left the workforce since COVID-19 arrived and are not counted as unemployed because they stopped looking for work. Furthermore, workers who have been laid off and are not working or collecting are also not counted as unemployed. Powell estimates that the true unemployment rate is around 11%, the highest since 1940.
Combine those facts with the ending of additional federal unemployment benefits in early August, and it’s easy to see why most people think we’re still in a severe recession. The Congressional Budget Office forecasts that GDP will not return to its pre-pandemic level until the third quarter of 2022.
Perhaps the best way to put it is this: we are slowly coming out of a very deep hole and we will not be completely out for quite some time. For economists, the keywords are “scalars.” For everyone else, the keywords are “very deep hole”.
