Real-Time Model of Economic Activity Turns Negative

Is a recession looming, or is it already upon us? Yes, recessions happen before people know it as they are called only after a lot of economic data is analyzed by the National Bureau of Economic Research. But the Atlanta Federal Reserve Bank has crafted what is known as the GDPNow gauge, a real-time model that is used to track economic activity.

At the close of the second quarter, on June 30, GDPNow turned negative. It showed a 1% decline in economic activity. Since GDP in the first quarter contracted 1.6%, that meant two consecutive quarters of negative growth. And that, ladies and gentlemen, is the classic definition of a recession.

As inflation hit a 40-year high in May, the Federal Reserve hiked interest rates and they may have slowed economic activity just enough to produce that negative growth. Fed Chairman Jerome Powell acknowledged the possibility of this occurring, but since its job is to fight inflation, it acted to get ahead of the situation. The Fed has raised interest rates three times this year, including a 0.75 percentage point boost – the biggest in 26 years – in mid-June.

The Fed does not declare a recession. That’s the job of NBER, a nongovernmental organization.