Real GDP declined 0.9% in 2Q22 after declining 1.6% in 1Q2022. The NEBR will take several months of analyzing various factors before deciding whether this is actually a recession.
“Gross domestic product (GDP) is the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production. GDP is also equal to the sum of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment. Real values are inflation-adjusted estimates—that is, estimates that exclude the effects of price changes.”
The BEA’s spreadsheet shows that they use the CPI to adjust the cost of energy product and housing and the PPI to adjust the value of inventories but I didn’t see an inflation adjustment for goods and services.
The Wall Street Journal has a nice graphic of GDP changes which you can see without a subscription.
Take a look at what happened when Paul Volcker determinedly conquered stubborn inflation by raising the fed funds rate starting in 1980. I remember this as the 1980-82 recession even though the NEBR counted it as two separate recessions. It felt like the unemployment rate was never going to go below 8% again. The stock market reached its nadir in 1982.
The guns-n-butter fiscal stimulus of the 1970s (Vietnam War plus Great Society programs), coupled with a weak Federal Reserve that dropped the fed funds rate at the first whiff of economic slowdown, led to intractable inflation.
The great fiscal stimulus of 2020-2021 is not ongoing and the current Fed is determined to quell inflation. It’s yet to be seen whether the slight drop in GDP will swerve them from their path of rising interest rates. I think it’s exactly what the Fed wanted to see. They will see this as a win, not a recession.
Expect more fed funds raises in the future. But if inflation doesn’t subside and they are forced to keep going higher, take a look at the 1980-82 recession. It could happen again.