Recession Since 2022: US Economic Income and Output Have Fallen Overall for Four Years

Introduction

The accuracy of official inflation statistics has been a topic of debate, with many academic papers written and doubts raised by various sources, including the New York Times and former President Donald Trump. This is significant not only due to the political implications of rising prices but also because these official inflation figures are used to calculate real economic growth by adjusting nominal dollars to inflation-adjusted dollars. This study aims to quantify some of the more significant biases in inflation statistics to provide a more accurate understanding of inflation and economic growth since 2019.

Adjustments

Measuring a nation's economy can be challenging due to insufficient data to directly measure all transactions or monitor all economic activity. Additionally, the measuring tool, in this case, the Federal Reserve note, changes value over time. Government metrics for inflation often underestimate the rise in prices over time, especially during periods of rapid currency depreciation. This study offers an alternative adjustment for converting nominal growth to real growth by more accurately reflecting changes in the cost of living over time.

Bias Related to Housing

The consumer price index (CPI), a commonly cited inflation gauge, measures the change in price for a fixed basket of goods and services over time. However, it doesn't directly account for the cost of homeownership, instead imputing this value from rents, without considering home prices or interest rates. This method becomes inaccurate when the cost of owning a home rises much faster than rents, as has been the case over the last four years.

Bias Related to Regulation

Quantifying the effects of certain government regulations can also pose challenges. For instance, if a regulation is assumed to increase the quality of a product, a substantial price increase could register as no price change or even a price decline in the national accounting used to compute gross domestic product (GDP).

Bias Related to Indirect Purchases

Measuring inflation and price changes can be difficult when consumers are not directly charged for services, such as health insurance. The CPI neglects both the actual cost of providing insurance and medical services and commodities and instead imputes the cost of health insurance from the profits of health insurers. This can distort the true level of inflation and affect estimates for consumer spending, artificially reducing a price index and increasing the estimate for real consumer spending and overall economic activity.

Implications for Economic Growth

The undercounting of inflation is particularly concerning given the high official inflation measurements over the last several years. The inflation itself has increased the nominal values of several key economic metrics without resulting in any real change. This is why there has been such a disparity between the rapid rise in nominal, pre-inflation GDP and the relatively slow increase in real, after-inflation GDP.

Implications for Incomes

These are all official numbers. When disposable personal income is deflated with a more accurate inflation metric, the real increase of 12.9 percent in disposable income from the first quarter of 2019 through the second quarter of 2024 becomes a real decrease of 2.3 percent over that period – an aggregate 15% difference.

Adjustments to Inflation Indices

To produce an alternative inflation metric that more accurately reflects the rise in the cost of living, several alterations must be made to the typical price indices used in the national accounts. These changes can be broadly categorized into three groups: housing, regulatory burdens, and indirectly measured prices.

Conclusion

According to our adjustments, cumulative inflation since 2019 has been understated by nearly half. This has resulted in cumulative growth being overstated by roughly 15%. This is a large amount for just 5 years – for perspective, peak-to-trough drop in real GDP during the 2008 crisis was 4%. Moreover, these adjustments indicate that the American economy has actually been in recession since 2022.

Bottom Line

The findings of this study suggest that the US economy has been in a recession since 2022, contrary to the mainstream narrative of robust growth. This discrepancy raises questions about the accuracy of official inflation and economic growth metrics. What do you think about this analysis? Do you believe the US economy is in a recession? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6 pm.