Real GDP says: get real. The second negative quarter of 2022 and the consumer who was never strong

On 28 July 2022 the Bureau of Economic Analysis reported that real gross domestic product had fallen for a second consecutive quarter, at an annualised 0.9 per cent, after the first quarter’s 1.6. Two consecutive declines in real GDP is the working definition of a recession used in most of the world and in every previous American downturn. Within the hour the White House, the Treasury and the chair of the Federal Reserve were explaining why it did not apply this time. This page kept two things: the arithmetic that had made the second quarter foreseeable, and what the response said about the people responding.

The arithmetic

Through June and July the financial press reported that the consumer remained resilient because retail sales kept beating expectations. Retail sales are reported in dollars. In a year of 8 to 9 per cent inflation, a rise in dollar sales of 1 per cent is a fall in the quantity of goods bought of 7 or 8 per cent. Consumers were not holding up. They were being forced to spend more to take home less, and cutting back as far as they could bear, which is never as far as the numbers require. The simple division that turns dollar sales into real sales was available to every economist quoted, and almost none did it.

GDP is reported in real terms, adjusted for inflation, precisely so that a rise in prices does not masquerade as a rise in production. So it was predictable, and was predicted here a week before the release, that when the second-quarter number arrived the “resilient” retail sales would appear inside it as a negative contribution. They did. Real GDP fell, and the fall was led by exactly the categories the press had been calling strong.

The definitions

The two-quarter rule is a shorthand, and the National Bureau of Economic Research, which dates American recessions, has never used it; it looks at employment, income, production and sales, and decides in retrospect. Both facts were true and both were pressed into service that week to explain why two falling quarters were not a recession. The argument made here did not need the shorthand. By the literal meaning of the word, an economy is in recess when it has receded from its last high and until it recovers to it, and real GDP had been below its high since the start of the year. The rest was a debate about labels, conducted by people whose interest was in the label.

The market’s reaction

The stock market rose on the news, as it had risen a week earlier on the “strong” retail sales. The reasoning the second time was that a recession would make the Federal Reserve stop raising rates and return to easing, the “pivot”. This page called the reasoning what it was. The only reason the Fed would stop tightening was that the economy was in the recession the market had spent a year denying; a recession, whether one was in it or heading into it, is not good news for earnings; and the Fed was not going to rush back to money creation into 9 per cent inflation, because the result would be worse than the recession. The pivot was the market’s hope, not the Fed’s plan, and it was being priced as a certainty.

The cost of not looking

The argument running through the piece was about intentional blindness. The government, the central bank and the financial press had all used the same dollar-denominated retail figures to tell the same story, and the story was wrong in a way that a calculator would have shown. It was not a difficult error. It was a convenient one, and convenient errors survive longer than difficult ones because nobody is paid to correct them.

Later note. The second quarter was later revised to minus 0.6 per cent, then to positive in the 2023 annual revision. The NBER never dated a 2022 recession, citing continued employment growth. The Fed did not pivot: it raised rates by three-quarters of a point in July and again in September and November, and did not cut until September 2024. The consumer, measured in units rather than dollars, did not recover the first quarter’s level of goods purchases until 2023.