You’d never know it from the headlines, but we’re not in a recession.
In just the past week, Time proclaimed “The Recession Isn’t Over – and It’s About to Get Much Worse for Some.” USA Today said “Efforts to lift economy out of recession pose risk of financial crisis.” The San Jose Mercury News warned that “The coronavirus recession could do long-term damage to California’s economy.”
So it’s jarring to hear Fed Chairman Jerome Powell say, as he did today, that “the recovery has progressed more quickly than generally expected” and that projections at last month’s meeting of the Federal Open Market Committee “show the recovery continuing at a solid pace.”
Recovery? Solid pace? With the latest week’s initial unemployment claims still more than three times greater than just before the pandemic? What planet’s data is the Fed looking at?
In fact, Powell is right—and so are the rest of us. Understanding how economists talk helps explain why they say there’s no recession and why ordinary civilians feel as if we’re in a bad one.
To an economist, the term “recession” isn’t about the level of economic activity but only about the direction of change. Until March, the direction was up. The economy was growing at a moderate pace; that’s an expansion. Then the coronavirus arrived in a big way; large parts of the economy shut down, and GDP fell 31% annualized in the second quarter. That’s the start of a huge recession. If it lasted long enough, we’d call it a depression, a less formal term among economists.
But, uniquely in U.S. economic history, it didn’t last very long at all. As businesses reopened and Washington injected some $3 trillion into the economy, activity began to rebound. Consumption of goods has bounced back, and business investment is increasing. To an economist, that change in direction of economic activity, from plunging to rising, is the end of a recession and the start of a recovery.
To a non-economist, a recession isn’t about direction of change; it’s about how bad things are, and they’re still bad. The official unemployment rate, 7.9%, is down from its April spike but still higher than it has been in nearly eight years and nearly twice what it was pre-pandemic. The official rate understates the suffering because millions of people have dropped out of the labor force since COVID-19 arrived, and they aren’t counted as unemployed because they’ve given up looking for work. In addition, workers who’ve been furloughed and aren’t working or getting paid 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 end 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 won’t get back up to its pre-pandemic level until the third quarter of 2022.
Maybe the best way to say it is this: We’re slowly climbing out of a very deep hole, and we won’t be entirely out for quite a long time. For economists, the key words are “climbing out.” For everybody else, the key words are “very deep hole.”