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--:-- Noel King: It's Today Explained. I'm Noel King. New GDP numbers indicate the U.S. economy contracted for a second straight quarter. That is one way we define a recession. But there are caveats upon caveats upon caveats here.
--:-- Maddie Noe: [Economic policy reporter at Vox] Big day for you. Welcome. What do the numbers tell us?
--:-- Noel King: So today's report found that gross domestic product adjusted for inflation fell 0.2% in the second quarter. Meaning that we now have two consecutive quarters of declining GDP.
--:-- Maddie Noe: Oh, my gosh. Boy, not only was I wrong, down nine-tenths of 1% on first look at second quarter GDP. Down nine-tenths of 1%.
--:-- Noel King: I know there's an organization that decides whether we're in a recession or not, but investors, they're not going to wait. And what does that mean? Two quarters of contraction. Why is that big news?
--:-- Maddie Noe: A common rule of thumb, and it's an unofficial definition of a recession, is that two quarters of negative GDP means that the country has entered a recession. That being said, though, that doesn't necessarily mean that we are in a recession just because recessions are officially declared by a committee of economists at the National Bureau of Economic Research.
--:-- Noel King: And so they do evaluate GDP, but they also look at other important economic indicators like the labor market, for instance. We're seeing all these headlines. We're in a – the Financial Times one is my favorite. The U.S. is in a technical recession.
--:-- Maddie Noe: But when does the National Bureau of Economic Research weigh in? When might we get their take on whether the country's entered into a recession?
--:-- Noel King: Yeah, so it typically takes some time. On average, at least a year. It can take longer. It can also take a shorter amount of time, but typically I would say about a year because they need to take the time to evaluate the data and they want to be absolutely certain.
--:-- Maddie Noe: So that's why they take their time. So, we got the GDP numbers today. And then is that the end-all, be-all of this report?
--:-- Noel King: No, the numbers do get revised pretty often. We are going to see revisions in the next few months, which is pretty common.
--:-- Maddie Noe: So the numbers could tell us something completely different. Just because it's negative today doesn't mean that the revision won't show that, for instance, GDP could have been positive in the second quarter.
--:-- Noel King: So as more data comes in, the Commerce Department will reevaluate and release its updates. Okay, so in a couple of months, everyone who's freaking out today might be a little bit embarrassed, but by that time, we'll have forgotten.
--:-- Maddie Noe: Why do we pay so much attention to GDP numbers on the day they're released, particularly because, as you just said, they're revised over time?
--:-- Noel King: I don't know if I have a great answer for this. I think just in general, people pay a lot of attention to GDP because it's a broad measure of the nation's economic health.
--:-- Maddie Noe: And so people are paying a lot of attention. I think people pay a lot of attention to right now, especially because there's already just been a lot of talks about a recession.
--:-- Noel King: And it does have bearing on our day-to-day lives, whether we're in one or not. And it does have bearing on our day-to-day psychology, whether we're in one or not.
--:-- Maddie Noe: Why are there multiple definitions? Why don't we just agree on one and stick to it?
--:-- Noel King: I think it's more so that there are just a lot of different interpretations of what a recession can look like.
--:-- Maddie Noe: And I think that because the National Bureau of Economic Research has such a broad definition of a recession and because they take a while to actually declare one, that then leads people to have different interpretations or have different definitions or certain benchmarks that then make them conclude that we are actually in a recession.
--:-- Noel King: Okay, so on July 28th, 2022, we have two quarters of contraction. That does technically signal a recession at this moment. What should we expect to follow? How do businesses and consumers tend to change their behavior knowing that we're technically in a recession?
--:-- Maddie Noe: I've asked this question to economists. And yes, I think seeing headlines about the United States being in a technical recession can have an impact on something like consumer sentiment, and it can make consumers sour on the economy.
--:-- Noel King: And so I think if consumers then see these headlines about the United States being in a recession they could potentially pull back their spending which is bad for economic growth which is then bad for GDP.
--:-- Maddie Noe: It probably wouldn't be the major driving force that, you know, sends us into an actual recession, but it is not a positive impact.
--:-- Noel King: How is the Federal Reserve responding to this so far? We're talking about an hour and 15 minutes after the numbers have been released. Has the Federal Reserve said anything? Have they indicated anything?
--:-- Maddie Noe: So no, I don't think the Fed has said anything at this moment. Yesterday, the chair of the Federal Reserve, Jerome Powell, had a press conference announcing the Fed's latest policy moves on inflation.
--:-- Noel King: Maddie, because a recession is such an important thing and it does have bearing on our day-to-day lives, whether we're in one or not. And it does have bearing on our day-to-day psychology, whether we're in one or not.
--:-- Maddie Noe: Why are there multiple definitions? Why don't we just agree on one and stick to it?
--:-- Noel King: I think it's more so that there are just a lot of different interpretations of what a recession can look like.
--:-- Maddie Noe: And I think that because the National Bureau of Economic Research has such a broad definition of a recession and because they take a while to actually declare one, that then leads people to have different interpretations or have different definitions or certain benchmarks that then make them conclude that we are actually in a recession.
--:-- Noel King: Okay, so on July 28th, 2022, we have two quarters of contraction. That does technically signal a recession at this moment. What should we expect to follow? How do businesses and consumers tend to change their behavior knowing that we're technically in a recession?
--:-- Maddie Noe: I've asked this question to economists. And yes, I think seeing headlines about the United States being in a technical recession can have an impact on something like consumer sentiment, and it can make consumers sour on the economy.
--:-- Noel King: And so I think if consumers then see these headlines about the United States being in a recession they could potentially pull back their spending which is bad for economic growth which is then bad for GDP.
--:-- Maddie Noe: It probably wouldn't be the major driving force that, you know, sends us into an actual recession, but it is not a positive impact.
--:-- Noel King: Maddie, what are you going to be looking at next? What are the indicators you're looking at next to determine, maybe not so much whether we're in a recession or not, because we do have to wait for that, but how strong the economy is or is not?
--:-- Maddie Noe: So there are a number of indicators that I'll be looking for. In terms of the labor market, I'm definitely going to be looking for any changes in the unemployment rate.
--:-- Noel King: Coming up next on Today Explained, as Maddie laid out, there is no one definition of what a recession is. However, there is something that economists overwhelmingly agree on. Growth is good. But we will ask, why do they think that?
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--:-- Noel King: Support for Today Explained comes from Chime. Nobody likes fees and complicated banking, says Chime. And Chime gets that, says Chime.
--:-- Jacob Goldstein: [Economics reporter] I'm Jacob Goldstein. I host a podcast called What's Your Problem? about people trying to solve tricky problems. I also wrote a book called Money, the True Story of a Made-Up Thing.
--:-- Noel King: Where does the story of GDP start? GDP is something that was invented, right? It's not something that exists in the world in its natural state.
--:-- Jacob Goldstein: And it was invented in the Depression by an economist named Simon Kuznets in the United States. And it's really interesting, actually. You know, GDP is basically what people mean when they say the economy. The economy grew, the economy shrank, whatever.
--:-- Noel King: What does GDP mean for how I live today? Like, does my life change based on what we've just learned about these GDP numbers?
--:-- Jacob Goldstein: So there's a few ways to think about that, right? Does your life change based on what happened with GDP in the last three months? And does your life change based on what happened in GDP in the last 10 years or 50 years, right?
--:-- Noel King: Like, definitely 10 years, 50 years, yes, a lot, right? And I think that the simplest way to think about the long-term change is if you think about different countries today, right? Think about people in the United States.
--:-- Jacob Goldstein: People in the United States, Americans who came here from other countries, typically came from countries where GDP is much lower, right? That's the way global migration tends to work.
--:-- Noel King: And like, clearly their lives are profoundly different in the United States. And that change in their lives is largely driven by the change in GDP, right?
--:-- Jacob Goldstein: So that's a useful way, I think, to look at long-run GDP growth and how big of a change it makes.
--:-- Noel King: Now, the sort of quarter to quarter numbers obviously don't make that kind of difference. I think the most meaningful thing that tends to happen when GDP goes down, which isn't that common, is people lose their jobs, right?
--:-- Jacob Goldstein: This is kind of a weird moment. Now we have high inflation. We're still in this post-COVID economy. But in general, when GDP goes down for a while, for a year, almost always unemployment goes up, right?
--:-- Noel King: So that is the obvious impact of short-run GDP. And conversely, you know, like after the financial crisis, we had this long run of GDP growth. And we saw, as you might expect, unemployment kept coming down and coming down and coming down.
--:-- Jacob Goldstein: More and more people were able to get jobs. So I think in the short run, jobs are the like obvious, meaningful thing in the world that is really closely tied to what GDP is doing.
--:-- Noel King: Is that why economists place such a high priority on growth? Like, why is growth the thing?
--:-- Jacob Goldstein: I think growth is the thing more for the long run reason, more for the 50-year reason or the 200-year reason. You know, I mean, the norm for human history was not growth, right? It was basically stasis.
--:-- Noel King: And the material conditions for almost everybody who lived up until, say, 1800 were gruesome, right? Were just incredibly grim.
--:-- Jacob Goldstein: And then you have basically the Industrial Revolution, and it kicks off this period that we are still living in, but that in human history is relatively brief, where we go from incredible scarcity to incredible abundance.
--:-- Noel King: And it is essentially GDP growth that has done that.
--:-- Jacob Goldstein: What does GDP not measure? What doesn't it take into account? I mean, it doesn't measure almost everything, right? It measures basically the value of everything everybody in a country makes it work, more or less.
--:-- Noel King: I mean, you could say the value of all the goods and services produced in a country, but basically the value of everybody's work, monetary value, which is a lot, but most of the world is not that, right?
--:-- Jacob Goldstein: So there are sort of classic things people point out that are omitted. One of the classics from the very beginning, actually, that was sort of controversial, they talked about should we put this in or not, was household work that is not done for money, right?
--:-- Noel King: So if I take care of my kids, that's not in GDP. But if I pay somebody to take care of my kids, that is in GDP.
--:-- Jacob Goldstein: So that's like kind of a weird one. The big, I think, today, important stuff that's not in GDP, the big, big one globally is pollution and carbon dioxide emissions in particular, right?
--:-- Noel King: Like, an important knock on growth is that this 200 years of incredible economic growth we've had has had really bad environmental consequences. And today, the most urgent one is climate change.
--:-- Jacob Goldstein: And like, that is not captured in GDP. And that's a problem if all you're looking at is GDP.
--:-- Noel King: And then there was that speech that Bobby Kennedy gave in 1968, where it sounded kind of hippie dippy, but Kennedy was no hippie.
--:-- Jacob Goldstein: But he was like, you know, GDP, or I think he was calling it gross national product in that speech, actually. He was saying it doesn't measure how well our kids are educated. It doesn't measure how cohesive we are as a society.
--:-- Noel King: It doesn't measure happiness, basically. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country.
--:-- Jacob Goldstein: It measures everything in short, except that which makes life worthwhile. And it can tell us everything about America, except why we are proud that we are Americans.
--:-- Noel King: So GDP can't do everything. But you have countries like Bhutan, where they measure gross national happiness.
--:-- Jacob Goldstein: The small Himalayan kingdom has a unique system that measures development through spiritual and emotional growth instead of material production.
--:-- Noel King: Does this seem ridiculous to you? Or does this seem like something that maybe could legitimately accompany GDP?
--:-- Jacob Goldstein: Yeah, I mean, yeah, Bhutan has it. New Zealand also introduced an alternative measure to GDP recently.
--:-- Noel King: We no longer be good enough to say a policy is successful because it increases GDP, if at the same time it also degrades the physical environment or drives down wages or fractures a community.
--:-- Jacob Goldstein: I think GDP is useful but limited. I talked once to somebody, an economist who wrote a book about GDP, and she said, it does what it says on the tin.
--:-- Noel King: Which is, like, I think perfect for GDP. Like, it's useful. It useful to know what going on in the economy right And of course it not all we should care about
--:-- Jacob Goldstein: And you know Kennedy is way more articulate than I am obviously but he right But that mean we should abandon it It just means we should keep it in its proper place which is like it a big important number, and it's not the only thing that matters.
--:-- Noel King: Is anyone seriously proposing that when we look at growth, we should knock points out of GDP if the growth we're seeing means that we had to raise a rainforest in the Amazon?
--:-- Jacob Goldstein: It's an interesting idea. I mean, a more straightforward move is just use GDP for what it's good for and like pay a lot of attention to how much carbon dioxide we're putting into the air, right?
--:-- Noel King: Like that seems fine to me. And to be clear, it's not like everything the US government does is aimed at maximizing GDP growth, right?
--:-- Jacob Goldstein: There are instances where we decide we're just not going to let people do this thing. We're not going to let people pollute in streams, even if it, you know, reduces GDP growth.
--:-- Noel King: We're going to pass the Clean Water Act. And like a carbon tax, which is economists' favorite idea for fighting climate change and seems like a very reasonable idea to me, certainly better than nothing, which is close to what we're doing now, right?
--:-- Jacob Goldstein: You can debate what would it do to GDP. But like, even if it were to push GDP down, great, do it.
--:-- Noel King: I think the answer to the environmental problems that have come with growth is not to like abandon GDP. It's just to use it for what it's supposed to be used for and not have it be the sole North Star of everything we do.
--:-- Jacob Goldstein: So no, you don't have to keep buying a new iPhone. So for hundreds of years, there was no growth. Everyone was kind of like getting by.
--:-- Noel King: And then we started growing. And now here we are in a situation where, I don't know, a lot of people are doing a lot better than they were 100 years ago.
--:-- Jacob Goldstein: A billion people lifted out of poverty since like 1990. I just wonder what would be, and I admit I'm saying this from the United States of America, a very rich country, but what would be the problem with stasis?
--:-- Noel King: What would be the problem with not growing.
--:-- Jacob Goldstein: You flagged at the end there in your outgoing caveat, maybe the biggest thing to think about there, which is most of the people in the world are not nearly as rich as most people in the United States in the developed world, right?
--:-- Noel King: And most of the emissions are going to come from the people who are not as rich as we are.
--:-- Jacob Goldstein: And so to speak globally, like I couldn't imagine saying to people in the developing world, sorry, you don't get to develop anymore.
--:-- Noel King: Furthermore, what would that even mean? How would it work?
--:-- Jacob Goldstein: And on another level, it would turn the economy into a zero-sum game. How? If you don't have growth, then any person who's doing better is doing so at the expense of someone else.
--:-- Noel King: And that seems bad to me.
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--:-- Noel King: Today's show was produced by Miles Bryan and Avishay Artsy. It was edited by Matthew Collette and fact-checked by Laura Bullard. It was engineered by Efim Shapiro.
--:-- Noel King: The rest of our team includes Halima Shah, Hadi Mawagdi, Victoria Chamberlain, and our newest producer, Amanda Llewellyn. Welcome, Amanda.
--:-- Noel King: Also my co-host, Sean Ramaswaram.
--:-- Noel King: Our supervising producer is Amina El-Sadi. Vox's VP of audio is Liz Kelly Nelson.
--:-- Noel King: The show uses music by Breakmaster Cylinder and Noam Hassenfeld.
--:-- Noel King: We're distributed to public radio stations across these United States in partnership with WNYC.
--:-- Noel King: I'm Noel King. Today Explained is part of the Vox Media Podcast Network.
--:-- Noel King: Support for this show comes from Macy's. Fall is right around the corner, and that means layering season is too.
--:-- Noel King: Macy's Fall Fashion Guide can help you get a pulse on all the latest trends and must-haves.
--:-- Noel King: Try a romantic look with a sheer top from INC. or mix it up with some fun textures like a faux fur bomber jacket from Karl Lagerfeld Paris.
--:-- Noel King: No matter your vibe, you can explore the Macy's Fall Fashion Guide and find the perfect look for you.
--:-- Noel King: Shop in-store or online at macy's.com.
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