Chart of the Week: Are We Headed Toward Recession?

Jeffrey DeMaso

Portfolio Manager

Does the negative GDP growth rate in Q1 mean we are in a recession?

I don’t think so.

First off, that 1.4% annual pace means the economy contracted just 0.4% in the first three months of the year—that’s a blip on the radar. Second, that decline is in “real GDP,” or GDP after inflation. “Nominal” GDP, which does not strip out the impact of higher prices, increased 1.6%—so there was some growth in the economy. Third, rather than just look at one quarter, if we consider the past 12 months, real GDP is up 3.6%.

On top of that, pop the hood on the GDP report and you’ll see that consumer spending, home building and business investment all increased in the first three months of the year. That typically doesn’t happen during a recession. The biggest factor in the first quarter’s negative number was a jump in imports and a decline in exports. In other words, U.S. consumers bought a lot more stuff than foreign consumers.

Also keep in mind that more than once in the last decade-plus, we’ve seen GDP decline for one quarter only for it to rebound the next. This happened in the first quarter of 2011, the third quarter of 2011 (hard to see in the chart, as it declined less than a tenth of a percent) and the first quarter of 2014.

While the shorthand definition of a recession is two consecutive quarters of declining GDP, that’s not actually what the National Bureau of Economic Research uses to make the determination. They instead look for “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” By that standard, we’re not there yet. Don’t equate negative GDP with a recession.