Economic recession or not amid the US tariffs?

In just about all countries, a recession is defined as two consecutive quarters of negative growth, but not in the US. For while the naming of recessions may run close to this two-quarter rule, the responsibility for officially declaring a recession lies with the independent Business Cycle Dating Committee (BCDC) of the National Association of Business Economists (NABE). The BCDC is a group of academic economists that consider not just how GDP has moved but also numerous other indicators. Most weight amongst these ‘other’ indicators lies with real personal disposable income and non-farm payrolls, but other federally-produced data are considered as well.

What’s more, there’s no strict formula that the BCDC uses in trying to determine whether a recession has occurred; the weight and breadth of relevant indicators can change. All of this does two things.

The first is that it can mean a two-quarter fall in GDP is not necessarily labelled a recession (but it could also mean that a one-quarter fall is sufficient if the decline is large enough).

The second is that recessions tend to be labeled after they have occurred, given the time it takes the BCDC to interpret all the relevant data. Both of these are important.

On the first, we can use an example from the first half of 2022 to show how the use of the BCDC can be advantageous compared to the two-quarter rule. For GDP did, indeed, decline for two consecutive quarters in the first half of 2022 on first reading. But the BCDC did not declare a recession and, eventually, the Q2 2022 data was revised to show a rise in GDP, not a fall. In other words, the two-quarter rule gave a false signal of a recession.

On the second issue, if a recession is declared in the midst of the downturn, as under the two-quarter rule, it can further depress consumer and business sentiment as everyone is informed that the country is in the midst of a recession. But, if a recession is defined only after the upturn starts, as under the BCDC rule, there’s less chance that business and consumer confidence will be materially depressed by confirmation of the downturn.

In short, Steven Barrow, Head of Standard Bank G10 Strategy thinks that there are many advantages of dating business cycles in this way and not through the two-quarter rule. Other policymakers around the world might want to emulate this but the problem is that the likes of the Centre for Economic Policy Research (CEPR) which does the same job for the euro zone, does not have official recognition, unlike the BCDC in the US. Hence, the euro zone is still seen to be covered by the two-quarter rule alongside other developed countries.

A key question going forward is whether the US and others will see a sufficient dip in growth that meets the recession definition, on either the two-quarter rule, or BCDC ruling. In the US, the NABE said that its post ‘Liberation Day’ survey of professional economists saw some 37% claim that there is a 50%, or more, probability of a recession in the coming year, against just 8% before the Trump tariff tantrum. The tariff shock could easily mean a sudden-stop in activity, particularly amongst firms engaged in trade, and that could quite conceivably produce two quarters of negative growth (as it could in other countries). But would the BCDC label such an uncertainty-driven, sudden-stop a recession?

Steven Barrow said if real personal disposable income holds up, alongside payrolls, which seems eminently conceivable, then the answer is likely to be ‘no’. And maybe we should also bear in mind the political pressure that could come to bear on the NABE and BCDC as a recession now would be the first truly policy-induced recession that anyone could remember. In short, the US may well experience two quarters of negative growth but it unlikely that it will experience a recession.