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The U.S. is Already in Recession—If The Atlanta Fed Is Right

Newsweek logo Newsweek 6/16/2022 Rob Minto
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America is almost certain to be in a recession when official figures are released, according to early data.

An update from the Federal Reserve Bank of Atlanta shows the economy on course for zero percent growth in the second quarter of 2022, and the trend from the data would suggest that the economy is on course for a contraction.

This would put the U.S. into an official recession—defined by economists and policymakers as two consecutive quarters of falling GDP.

The value of goods and services in the U.S. economy—Gross Domestic Product, or GDP —shrank by 1.5 percent in the first quarter of 2022.

Combined with 40-year high inflation, this would put the U.S. economy in a period of what is called "stagflation", a portmanteau word of stagnation (i.e. recession) and inflation.

The Federal Reserve Bank of Atlanta publishes a forecast called GDPNow, which the bank says "provides a 'nowcast' of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis."

The Bank said in its publication: "The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is 0.0 percent on June 16, unchanged from June 15 after rounding. After this morning's housing starts report from the US Census Bureau, the nowcast of second-quarter real residential investment growth increased from -8.5 percent to -7.7 percent."

The Federal Reserve Bank of Atlanta GDPNow chart shows the estimate of GDP for the second quarter is currently zero. Federal Reserve Bank of Atlanta © Federal Reserve Bank of Atlanta The Federal Reserve Bank of Atlanta GDPNow chart shows the estimate of GDP for the second quarter is currently zero. Federal Reserve Bank of Atlanta

The Atlanta GDPNow figure isn't always perfect—according to the bank's own analysis, since it started tracking GDP growth with versions of this model in 2011, "the average absolute error of final GDPNow forecasts is 0.84 percentage points."

The bank adds that its model is becoming more accurate over time.

Although the first three months of 2022 showed the economy shrinking by 1.5 percent, analysts at the time were not forecasting a recession. Consumer and business spending were still high. The contraction was partly due to a widening of the trade gap. Overall, the country spent more on imports than other countries did on U.S. exports. The trade gap was responsible for 3.2 percentage points of the fall in GDP.

The GDPNow forecast will be unwelcome news for the Federal Reserve. Fed Chair Jerome Powell said on Wednesday that "We're not trying to induce a recession," as the Fed raised interest rates by 0.75 percentage points, putting the benchmark federal-funds rate to a range between 1.5 percent and 1.75 percent, largely to try and curb inflation. The steep increase in rates was the highest since 1994.

The goal for the Fed is getting inflation down to the typical target of 2 percent, but without causing a recession—making what is known as a "soft-landing" for the economy.

However, Powell admitted that "those pathways have become much more challenging due to factors that are outside of our control."

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