Ben Bernanke wasn’t the biggest fan of labels. In 2008, the Federal Reserve chair urged Congress not to get hung up on the definition of recession. What mattered most was the financial pain and economic trouble — and working out how it came about and what to do about it.
His advice was stirring, given Bernanke’s former membership of the academic panel that declares the rise and fall of US expansions. It’s also relevant in understanding today’s travails. Much time has been spent on whether the American economy meets the practical definition of the R-word, or whether technicalities matter most. Do two consecutive quarters of decline in gross domestic product warrant the description, as is the case in many countries? We can always wait for the official call from the National Bureau of Economic Research, on whose business cycle dating committee Bernanke once sat. But the secretive group typically takes about a year to declare the onset of a slump and is dismissive of the two-quarter GDP metric.
Deliberating on tags can be a distraction. It’s better to focus on the substance of the problem: a pronounced and synchronized global downdraft that shows little sign of abating. China’s economic fragility was underscored on the weekend when reports showed manufacturing again contracting. That dashed hopes the economy was on the mend after struggling to grow in the second quarter. Sales at top property developers tumbled more than a third from a year earlier, and homebuyers are refusing to pay mortgages on some stalled projects. Beijing is crab-walking away from its target of around 5.5% growth this year. On Tuesday, Bloomberg News reported that top leaders told officials to regard the number as guidance rather than an ambition that must be achieved. Private-sector economists had for some months considered it fanciful.
The motor of the euro region, Germany, may already be in recession. With gas deliveries from Russia now a huge question mark, it would be unwise to anticipate a recovery before next year. GDP fell for two quarters in the US and Fed officials say they must restrain the economy further as the cost of reining in rapid price increases. There’s a lot riding on Friday’s employment report from the Department of Labor: Optimists point to robust jobs growth in June and an unemployment rate that’s near a five-decade low. Skeptics point to rising weekly jobless claims and say that the labor market is often a lagging indicator.
Outside US hiring, the outlook is more dour. The global economy will probably grow about half last year’s 6.1%, the International Monetary Fund projects. Not a disaster and still some distance from the 2.5% clip the lender uses to judge whether world commerce is underwater or muddling through. But the direction is worrying. The fund’s forecasts have been heading south for a while and officials sound gloomier almost by the month. The latest markdown, released last week, says things are likely to get worse before getting better. The march toward higher interest rates that typifies pretty much every economy — aside from miscreants like Turkey — will take a big toll. The IMF considers quashing inflation to be a vital prerequisite for economic stability, but isn’t pretending it’s cost free.
Economists at Bank of America Corp. fret that many forecasts are too rosy. Supply chain woes get plenty of oxygen, but a more profound shock is the rapid tightening of policy. Estimates of economic performance are flattering, the firm says, and bear great resemblance to those of monetary policy officials. “Not only are the growth outlooks optimistic, in virtually every economy the central bank wins the inflation battle without a recession,” wrote Ethan Harris, global economist at BofA, in a July 29 report. “Apparently fighting inflation is a fairly painless exercise.”
There are multiplying reasons to worry about the world economy as a whole, rather than as a series of independent fiefdoms. Too often the first questions directed at officials about the existence or otherwise of a recession has a Gotcha! flavor. Better to focus on the underlying conditions.
A touch of empathy is always useful, too. On July 15, 2008, with the bailout of Bear Stearns Cos. a few months old and the collapse of Lehman Brothers Holdings Inc. soon to crater world finance, Bernanke was confronted by Robert Casey, a Democrat senator from Pennsylvania, with the case of a constituent who put food fourth on her list of priorities behind house payments, daycare and gasoline. “I agree with you entirely that whether it is a technical recession or not, the combination of declining wealth, weak job market, rising food and energy prices, foreclosures, tight credit — all those things are putting tremendous pressure on families and explain why consumer sentiment is very low,” Bernanke told the Senate banking committee that day. “People are very worried. So I certainly would never make the claim that even if we were not in a technical recession that it was not a serious situation.”
The economy was subsequently declared to be in recession.
A lot of attention is focused on GDP, too, but the news isn’t great there, either. There appears little respite in Europe and important parts of Asia. Rather than laboring over textbook definitions or alphabetic monikers — remember the games in 2020 over whether the recovery was a U, L, V or W? — let’s accept this downdraft has a distressing geographic consistency.
It’s cause for concern in any language.
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