by Clark Merrefield, The Journalist’s Resource
The U.S. economy, as measured by gross domestic product, slumped for two consecutive quarters to start 2022, according to recently released federal data, some of which is preliminary and may be revised in several weeks.
In the last few days, some news outlets all but outright declared a recession, while others were more guarded, considering that other topline economic data, such as the unemployment rate, is in line with a healthy, growing economy.
Conflicting economic information is what makes this recent GDP decline an unreliable recession harbinger. It’s important for journalists to aim for clarity in headlines and coverage and to help audiences understand what a recession is and isn’t, who decides when the economy is in recession, and what really matters to most Americans’ economic perceptions.
Keep reading for our four tips aimed at helping journalists make sense of the potential outset of an economic downturn.
1. Clarify the difference between quarterly changes and annual rates, especially in headlines.
In June the Bureau of Economic Analysis, the federal agency that estimates GDP, put out its final GDP numbers for the first three months of 2022, showing that the economy contracted at a quarterly rate of 0.4%.
Some national news outlets, however, used the estimated annual rate — about 1.6% — in their headlines. The economy “slipped 1.6% to start the year” or “shrank 1.6% in the first quarter,” these news outlets said in headlines, implying that the economy fell by the estimated annual rate during the first three months of 2022.
The estimated annual rate is calculated using an annualization formula. Annualization shows what would happen if the economy kept contracting or growing at the current quarterly pace. Here is the Bureau of Economic Analysis’ annualization formula. This is another good technical explanation from the Federal Reserve Bank of Dallas on how annual rates are calculated.
The Bureau of Economic Analysis presents GDP at an annual rate because annualization allows comparisons over time that more accurately show what is happening in the economy than do quarter-to-quarter changes. Imagine a car race where one car is going a little faster than the other. It would make sense to think the faster car will win. But if the slower car starts accelerating at a higher rate, that says something different about what’s happening in the race: The slower car will soon overtake the faster car.
The point is to avoid presenting the estimated annual rate as if it were the actual quarterly change. Journalists can take a few moments in their stories to explain annualization. The technical details won’t matter for most audiences, but what’s important to share is that annualization shows what would happen if the economy continued apace.
This issue arose in a pronounced way during the early days of the pandemic recession, which lasted from February to April 2020. During the second quarter that year, U.S. economic output fell by about 9% from the first quarter — 31% annualized. Both numbers were unprecedented. But to say that the economy shrunk by a third in a single quarter would have been inaccurate.
The scale is different now, but accuracy always matters. As New York Times economics reporter Ben Casselman explained in an Econofact podcast last October, “sometimes it just means making sure that we are taking a step back and helping people understand the way these numbers are reported.”
The Bureau of Economic Analysis does not make the quarter-to-quarter rates of change easy to find. Its main news release always refers to the annual rate in the first sentence. But you can find the quarterly rate in the technical note. The Federal Reserve Bank of St. Louis provides a variety of historical, inflation adjusted GDP data options here, which you can download as a spreadsheet.
Another useful tactic to provide context on where the economy has been and where it is now is to compare annual changes rather than quarter-to-quarter — for example, from the second quarter of 2021 to the second quarter of 2022, rather than from the first to second quarters of 2022.
Remember, the formulas the Bureau of Economic Analysis uses to calculate quarterly and annualized rates of change are available here. If your news outlet decides to use the estimated annual rate in headlines, be clear that is what you are referring to, as CBS News does here.
2. Report when data are preliminary.
Let audiences know if it’s the case that the economic data you’re reporting on are preliminary and subject to change. For example, the Bureau of Economic Analysis will continue to analyze data and tweak its recent GDP numbers.
The first estimate of GDP for the second quarter of 2022 came out July 28 and is known as an “advance” estimate. The second estimate is due Aug. 25 and the third and last expected estimate for second quarter GDP is due Sept. 29. Revisions to past years’ GDP data are usually released in late July and are called “latest” estimates.
Compare how updated estimates compare with original estimates here. For the first quarter of 2022, the annual rate was -1.4% for the advance estimate, slightly better than the third estimate of -1.6%. Regardless of whether the economy shrank or grew, annual GDP rates change on average 0.6 percentage point from the advance to the third estimates.
3. Mention the role NBER plays in determining a recession and remind audiences that two consecutive quarters of negative growth does not necessarily equal a recession.
It’s not a recession unless the Business Cycle Dating Committee of the National Bureau of Economic Research says it is. The nonprofit economic research organization, based in Cambridge, Mass., determines when recessions start and end. Its purpose is to establish the historical record for recessions, not to rush to say whether or not the U.S. economy is currently in one. The White House calls the Business Cycle Dating Committee the “official recession scorekeeper.”
The committee is made up of eight academic economists. They define a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The committee waits for preliminary data to settle before making their determinations.
“I think another really important point is that the NBER does not just look at GDP, but at a range of variables — including unemployment,” Michael Klein, an economist at Tufts University and founder of Econofact, tells us by email.
The exact process is opaque, but the data the committee analyzes also includes “real personal income less transfers, nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, employment as measured by the household survey, and industrial production.”
The committee refers to the start of a recession as the economy’s “peak” and the end of the recession as its “trough.” Think of going up a roller coaster — you hit the peak and you start going down. You hit the bottom, or the trough, and you start going up again.
The thing for journalists to relay to their audiences is that two consecutive quarters of negative growth does not necessarily equal recession, especially when other economic indicators remain strong. That said, the last time there were two consecutive quarters of GDP contraction that didn’t overlap with a recession was in 1947, according to Bureau of Economic Analysis data.
But again, this is a peculiar time for the U.S. economy. As many others have pointed out, current big picture economic data other than GDP points to a healthy economy. The unemployment rate, at under 4%, remains historically low. Consumer spending is also in positive territory. At the same time, inflation is running well above the Federal Reserve’s inflation target.
The data are mixed, but not clearly pointing to a recession. Going back to the early 1960s, Klein points out that there has not been a recession with the unemployment rate as low as it is now.
4. Remember that many people care about their household finances more than whether the U.S. is officially in a recession.
Individual experiences will vary widely from what aggregate data shows. Journalists can offer nuanced perspective on what is happening economically in their coverage area, aside from what is happening at the national level.
Timothy Taylor, managing editor of the Journal of Economic Perspectives and author of the Conversable Economist blog, put it like this in an email to The Journalist’s Resource: “The value-added of journalism is context and background.”
Consider food and fuel prices. In making decisions on interest rates, the Federal Reserve keeps a close eye on an inflation measure called core Personal Consumption Expenditures, which excludes food and fuel prices. Costs for food and fuel can swing wildly, so the central bank doesn’t usually consider those prices as an accurate indication of overall economic conditions.
Still, as many people in the U.S. have experienced in recent weeks, fuel prices can affect a household’s bottom line month to month. If more money is going toward fueling up the family cars, households may cut back on higher cost items elsewhere, including spending less at the grocery store.
“For the average person, whether real GDP is a few tenths on the positive or the negative won’t be perceptible, but whether their wages are falling behind inflation is quite clear,” Taylor adds.
A previous version of this article stated "It's not a recession until the National Bureau of Economic Research says so." As David Henderson, graduate economics professor at the Naval Postgraduate School in Monterey, Calif., pointed out in a blog post, a recession could be underway or even over before the NBER designates it a recession. As such, we have changed that line to: “It's not a recession unless the National Bureau of Economic Research says so.”