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GDP declined again — but that might not mean we’re in a recession

What the latest economic data does and doesn’t mean.

Traders work on the floor of the New York Stock Exchange on July 27.
Timothy A. Clary/AFP via Getty Images
Madeleine Ngo covers economic policy for Vox. She previously worked at the New York Times, the Wall Street Journal, Bloomberg, and the Philadelphia Inquirer.

The latest economic data report makes it official: The US has now seen two quarters of declining GDP, meaning the economy shrank in the first six months of the year. It’s a common but unofficial definition of a recession.

GDP fell at an annual rate of 0.9 percent in the second quarter of the year, according to data released by the Commerce Department on Thursday. That comes after GDP fell at a 1.6 percent annualized rate in the first quarter.

So is the US entering an economic downturn?

Although some may claim the United States is now in a “technical” recession, many economists say this probably doesn’t mean the country is in a recession because the overall labor market is still strong.

“I don’t think these two quarters of negative growth indicate a recession at this point,” said Beth Ann Bovino, the chief US economist at S&P Global.

Recessions usually mean that more people are losing their jobs and struggling to find new ones. So far, that doesn’t seem to be happening. Bovino pointed to several indicators that underscore the health of the labor market: The unemployment rate stands at 3.6 percent, just slightly above its level before the pandemic, which was at a 50-year low. Employers have added hundreds of thousands of jobs to the economy each month. Unemployment claims have been rising in recent weeks, but they’re still at low levels. Job openings have also dipped slightly, but there are still nearly two job openings for every unemployed person.

Recessions are formally declared by a group of eight economists at the National Bureau of Economic Research who make up the Business Cycle Dating Committee. The group defines a recession as a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

GDP, a broad measure of the nation’s total economic output, is an important aspect the committee considers, but it’s not the only one. The committee also looks at employment levels, personal income, retail sales, and industrial production. But the committee often takes about a year to formally declare the start of a recession, meaning that they probably won’t make an announcement anytime soon.

Economists who don’t believe the country is in a recession point out that the United States isn’t seeing a sharp uptick in the unemployment rate or widespread layoffs across different economic sectors, although activity in sectors like housing is slowing as the Federal Reserve increases interest rates, making it more expensive for Americans to take out a mortgage.

The GDP data is also subject to revisions, and Thursday’s report only includes the advance numbers for the second quarter, meaning that the numbers could be revised upward or downward in the coming months. The next revision for second quarter GDP is set to be released on August 25, and will account for more data that isn’t available yet.

“Both the first quarter and the second quarter could easily be revised to be positive or could be revised to be worse,” said Jeffrey Frankel, a former member of NBER’s Business Cycle Dating Committee and an economics professor at Harvard’s Kennedy School.

Still, the economy is clearly cooling, and even if the United States isn’t in a recession yet, that doesn’t mean a painful economic downturn won’t hit in the coming months.

The economy is slowing significantly

According to the GDP report, consumer spending slowed in the second quarter, growing 1 percent on an annualized basis compared to 1.8 percent in the first quarter. Business investment also weakened in the second quarter.

“Consumers are still spending,” said Gregory Daco, the chief economist at EY-Parthenon. “They’re just spending with more caution and more worries about inflation. Businesses are still hiring and they’re investing, but they are also generally worried about the outlook.”

Mark Zandi, the chief economist at Moody’s Analytics, said it was expected to see some slowdown in spending since the Fed wants to see the economy cool as it lifts interest rates. Although he said he wasn’t extremely worried about the slower pace of growth in the second quarter, he said it creates some cause for concern, especially since consumer sentiment is sinking.

“You reasonably fear that this isn’t where it’s going to stop and that we’re going to continue to slide and start to see some actual outright declines in consumer spending,” Zandi said.

The decline in GDP was also fueled by a downturn in the housing industry, one of the most interest rate-sensitive sectors. Residential investment fell 14 percent at an annual rate in the second quarter as home construction slowed and sales of new and existing homes fell.

“All those indicators in the housing market are pointing down,” said Yelena Maleyev, an economist at KPMG. “Housing is definitely a concern to us as we go into the second half of the year.”

The Fed is also set to continue hiking interest rates this year, which will likely slow the economy further. By making borrowing money more expensive, central bank officials are trying to dampen consumer demand, which should eventually result in a drop in prices. But the Fed risks going too far, causing a downturn in the labor market as businesses pull back on hiring. Some companies, including Google and Apple, have already announced plans to slow hiring in the coming months.

Jerome Powell, the chair of the Federal Reserve, said on Wednesday that he did not believe the United States was in a recession now, pointing to the “very strong” labor market, although he noted that there were signs that the economy was cooling. He also acknowledged that the path to avoiding a recession had “narrowed” and the labor market would likely have to soften to bring down inflation.

“We’re not trying to have a recession, and we don’t think we have to,” Powell said at a press briefing. “We think that there’s a path for us to be able to bring inflation down while sustaining a strong labor market.”

On Wednesday, the Fed raised interest rates three-quarters of a percentage point, another big increase and the fourth time the central bank has raised rates this year. The move came after recent inflation data showed that consumer prices rose 9.1 percent from a year earlier in June, a new four-decade high.

Powell said that another “unusually large” interest rate hike could be appropriate at the Fed’s next policy meeting in September, although officials have yet to make any decision and will evaluate new data in the coming weeks.

After the GDP report’s release, the Biden administration tried to temper fears about an economic slowdown, which could hurt President Biden’s already low approval ratings and Democrats politically ahead of the midterms. Biden said in a statement that it was “no surprise” that the economy was cooling as the Fed tries to tame inflation. In remarks to reporters later on Thursday, he also underscored the strength of the labor market, pointing out the low unemployment rate and millions of jobs created this year.

“That doesn’t sound like a recession to me,” Biden said.

But even if the United States isn’t in a recession, many Americans are still facing hardships. Households are finding it difficult to afford basic essentials, like rent and food at the grocery store. Although gas prices have started to fall from a peak of more than $5 a gallon last month, fuel prices are much higher than they were a year ago. And the economy still contracted, which isn’t great for American businesses and consumers.

“It’s never pleasant to see a negative number for GDP,” Bovino said. “It means the economy shrank and somebody feels it, and that’s not good.”

Update, July 28, 4:45 pm ET: This story has been updated to include new source comments.