The possibility of GDP growth is negative in the second quarter has been raised by unexpected slowdowns in incomes and spending, private investments, and manufacturing activity. This new data has changed the Atlanta Federal Reserve’s GDP Forecast from 0.3% growth in June 30 to 2.1%. The GDP fell 1.6% in the quarter that ended June 30, so if the Atlanta Fed’s forecast is correct, then we would now see two consecutive quarters with shrinking GDP. Official figures for the second-quarter GDP growth will be available on July 28.

A recession was defined as a period of declining GDP in consecutive quarters. The National Bureau of Economic Research (NBER), which formally defines the dates of a recession’s start and end dates, now uses a more broad definition. It can mean that the economy has been experiencing a decline for two consecutive quarters and that we are in a recession. Ed Yardeni, the economist, declared that it was (unofficially!) a recession in a June 30 research paper.

It would be amazing! It’s not uncommon for recessions to sneak up. The NBER, which values accuracy over speed, doesn’t usually identify the date of a recession until later. For example, the “Great Recession” began in November 2007 when the unemployment rate was only 5%. It was not known at the time. That recession was not called by the NBER until one year after the 2008 financial crash, which made it clear that an enormous wipeout was in progress.

One strong reason to believe that we are not in a recession is the hot labor market. The unemployment rate is now 3.6%, down from 4% in January. This is almost the same as the 3.5% mark 52 years ago. The U.S. has twice as many job opportunities for those who are unemployed. The unemployment rate has not fallen since 1948 when there was a recession. Because businesses worry about the slowing economy, they tend to increase their unemployment rate and stop hiring.

There is no post-war parallel that can be drawn to the current state of the U.S. economy. Inflation was high in the 1970s and 1980s, just like now. Modern history has never seen anything like the COVID pandemic with its severe distortions of supply-demand relations. During the pandemic, consumer demand for certain goods rose while supply-chain disruptions made these goods less available. Result: inflation.

However, this is now going in the opposite direction. As demand for goods slows, Americans are spending more on services such as air travel. Inflation is shifting from goods to services, and there are acute shortages of workers in the service sector. This is why airlines are canceling flights and leaving passengers stranded.

Economic models are being affected by energy prices, which can cause them to be out of sync. Due to Russian President Vladimir Putin’s invasion of Ukraine, gasoline and other energy prices have reached record levels. This is causing a rise in the price of food, manufactured goods, and other products that need the energy to produce or transport. However, high prices are also causing “demand destruction”, which is when people cut back on their purchases due to high prices. That’s … recessionary.

Meanwhile, the Federal Reserve is trying to slow down the economy aggressively. Even Fed Chair Jay Powell believes that the Fed could make a mistake and go too far, leading to a recession. Powell believes that even if the Fed does go too far, it is a fair price for trying to bring inflation down from 8.6%.