SIOUX FALLS, S.D. (KELO) — Are we in a recession? Gov. Kristi Noem says we are. Federal Reserve Chair Jerome Powell says he doesn’t think so.
But what is a recession, actually? To find an answer, we spoke with Kathryn Birkeland, Associate Dean and Associate Professor of Economics at the Beacom School of Business with the University of South Dakota.
Birkeland is a macro-economist with a background in the study of recessions, monetary policy and labor market changes.
In a post on Twitter, Noem said that we are in fact in a recession.
@JoeBiden has driven our country into a recession.Tweet from Kristi Noem
Meanwhile in South Dakota:
Fastest income growth in America
2nd in the nation for inbound moving
If @POTUS wants to pull the nation out of this recession, he should follow South Dakota’s example.
But how does she know? According to Birkeland, it can actually be quite tricky to tell.
“When we talk about defining a recession, it’s quite hard to do,” said Birkeland. “Generally, we think of a recession as a period in which economic activity has slowed down.”
The exact science of determining a recession takes a long period of time, Birkeland notes, but says that there are some key indicators; three, specifically. “We want to talk about GDP (gross domestic product) growth — we want to talk about unemployment — the third one is inflation.”
“Unemployment is lower now than it has been, which is the sign of a strong economy,” Birkeland said. “Whereas negative GDP growth is a sign of a weak economy. So those two aren’t necessarily giving us the same signal.”
Right now, Birkeland points out that inflation is high. “Here, we know that some of that inflation is coming from the supply side issue — if it was only that lots of people were flush with cash — that would be what we call a normal expansion, and the goal would be to pull back on that to get prices to fall back down,” she said.
We are not in a typical stage of inflation, Birkeland said. “Unemployment is lower than normal, and inflation is higher than normal, so it’s not necessarily straight-forward to say we’re in a recession, because not all three of those statistics are pointed in the same direction.”
Birkeland says we are definitely in a period of slowed economic activity, but she also says that’s intentional.
“That was the intention of the Federal Reserve raising interest rates,” Birkeland said. “That’s how inflation comes under control, is that we have less spending on goods and services.”
Essentially, the Federal Reserve is undertaking an intentional slowing of the economy, unlike the sort of economic downturn we saw in 2008, in order to lower inflation and bring down prices.
As previously mentioned, Federal Reserve Chair Jerome Powell does not think we’re in a recession, outlining his reasoning in response to a question at a Federal Reserve news conference.
I do not think the U.S. is currently in a recession. And the reason is there are just too many areas of the economy that are performing too well. And of course, I would point to the labor market, in particular. As I mentioned, it’s true that growth is slowing. For reasons that we understand. Really the growth was extraordinarily high last year, 5 and a half percent. We would have expected growth to slow. There’s also more slowing going on now. But if you look at the labor market, you’ve got growth, I think payroll jobs averaging 450,000 per month? That’s a remarkably strong level for this state of affairs. The unemployment rate at near 50-year low at 3.6 percent. All of the wage measures that we track are running very strong. So this is a very strong labor market, and it’s just not consistent with– 2.7 million people hired in the first half of the year? It doesn’t make sense that the economy would be in recession with this kind of thing happening. So, I don’t think the U.S. economy’s in recession right now.Jerome Powell, Federal Reserve Chair
This opinion, that economic factors including a strong labor market mean we are not in fact in a recession, was later echoed by President Biden, who Tweeted:
After historic economic growth – regaining all private sector jobs lost during the pandemic – we knew the economy would slow down as the Fed acts on inflation. Our job market is strong, spending is up, and unemployment is down. We have the resilience to weather the transition.Tweet from President Biden
What actual effect does the labor market have? Quite a bit one, it turns out.
“The labor market, in general, has a couple of components,” said Birkeland. “The first one that we often hear about is the unemployment rate.”
Birkeland says that the current low unemployment rates we have to do with the labor force; the percentage of the population who is either working or looking for work. “This fraction of the population that wants to work has actually decreased since the pandemic,” she said. “For a long time, the labor force participation rate hovered around 67% — lately it has been falling, and in some places as low as 60% or below.”
The combination of fewer people in the labor force, and no decrease in demand for products has increased the demand for workers. “This is part of the reason why we see a lot of people switching jobs,” Birkeland said. “The demand for their labor is pretty high.”
Due to this increased demand, many are seeing some increases in wages. Despite this increased cost for businesses to employ labor, companies are still hiring.
“Those are indicators of a pretty strong labor market,” said Birkeland. “Remember, firms only demand labor if they’re going to produce output.”
According to Birkeland, this expectation of future output by companies is a good sign. “It is actually a pretty good indicator — it turns out when their profit is on the line, firms are pretty good at making that decision about what to do moving forward.”
Birkeland thinks this is a good sign. “Although the Fed is raising interest rates to pull back on spending and to get inflation under control, they don’t believe it’s going to push us deep into a recession,” she said. “They truly think that given all the data and the action the firms are taking, that it will simply cause the firms to maybe slow down a bit, but not pull back.”