During Recession, Production Declines and Unemployment Rises... Despite GDP Drop, US Unemployment Rate Only 3.6%
[Asia Economy Reporter Park Byung-hee] "If the economy is said to be in a recession despite not having many job losses, I would be very surprised."
Harvard University professor Gregory Mankiw made this remark regarding the ongoing debate about a possible recession in the United States. Professor Mankiw is known as the "father of economics textbooks" and is the author of "Mankiw's Economics," a well-known introductory economics book in Korea.
Concerns about a recession are growing as the U.S. Gross Domestic Product (GDP) is expected to decline for two consecutive quarters. However, there are also strong counterarguments. The Wall Street Journal (WSJ) reported on the 4th (local time) that if the current U.S. economy is in a recession, it would be a very unusual case, citing Professor Mankiw's view. It is considered unreasonable to judge a recession without an increase in unemployment. WSJ noted that typical characteristics of a recession include a decline in production and a rise in unemployment, but the current U.S. labor market remains robust, fueling debate over the recession.
According to the GDPNow economic forecasting model of the Federal Reserve Bank of Atlanta, U.S. GDP is expected to decrease at an annualized rate of 2.1% in the second quarter. The U.S. GDP already declined at an annualized rate of 1.6% in the first quarter. Generally, two consecutive quarters of GDP decline are considered a technical recession.
However, the official body that determines whether the U.S. economy is in a recession is the National Bureau of Economic Research (NBER). Professor Mankiw served as an NBER member in the 1990s. The NBER, composed of eight members, assesses recession status by comprehensively analyzing production, income, manufacturing activity, corporate sales, and employment conditions.
Since the end of World War II, the NBER has identified 12 recessions in the U.S., including the COVID-19 recession in 2020. None of these 12 recessions had unemployment rates as low as the current level.
During the previous 12 recessions, the unemployment rate increased by an average of 3.5 percentage points (median). However, the current U.S. unemployment rate is on a downward trend, falling from 4% in December last year to 3.6% last month. The unemployment rate for June, to be released on the 8th, is also expected to remain at 3.6%. An unemployment rate of 3-4% is considered virtually full employment, accounting for natural unemployment.
During recessions, monthly job losses typically occurred at a rate of about 3%. However, from December last year to May this year, U.S. jobs increased by 2.4 million, a growth rate of 1.6%.
Claims for unemployment benefits also reflect a strong employment situation. As of the end of last month, the number of continuing unemployment benefit claimants was 1.3 million, lower than the average of 1.7 million during the three years before the COVID-19 pandemic when the U.S. economy was healthy. During the global financial crisis recession from 2007 to 2009, continuing claims exceeded 6.5 million.
Robert Gordon, a current NBER member and professor at Northwestern University, also stated, "Other economic indicators show a recession, but the labor market does not." However, Professor Gordon added that employment indicators might lag by a few months.
WSJ analyzed that the NBER may place the greatest importance on employment indicators when determining a recession. While production or income indicators were sometimes favorable during periods the NBER judged as recessions, employment indicators were never favorable.
WSJ cited examples from 1960 and 2001. In 1960, despite an increase in household income adjusted for inflation, the NBER judged the period as a recession. In 2001, production did not decline significantly, and there was no two consecutive quarters of GDP decline, but the NBER still judged it as a recession.
The common factor in these two recessions was job losses. The U.S. unemployment rate rose by more than 1.9 percentage points between 1960 and 1961, and during the 2001 recession, the unemployment rate increased from 4.4% to 5.5% between March and November.
The NBER determined that there was a recession for about two months from February to April 2020 due to the COVID-19 pandemic shock, during which the unemployment rate surged by 11.2 percentage points. During those two months, 22 million jobs were lost, 14 times the number of jobs lost in any two-month period since the Great Depression.
Gufreet Gill, a bond sector investment strategist at Goldman Sachs Asset Management, also said in an interview with Bloomberg TV on the same day, "The base-case expectation is that the U.S. economy is not in a recession." He added, "Monetary policy tightening will continue, and a technical recession may occur," but "when considering investment opportunities, the nature and extent of the recession are important."
Gill expects the pace of job growth to slow as the Fed raises the benchmark interest rate but emphasized that the Fed will moderate the pace to avoid large-scale layoffs.
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