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Treasury Secretary Janet Yellen delivers remarks during a press conference at the Treasury Department in Washington on July 28.Win McNamee/Getty Images

The American economy unexpectedly shrank for the second quarter in a row between April and June, triggering a fight among economists and politicians over whether the U.S. faces a full-blown recession, or simply a technical one.

Gross domestic product fell at a 0.9-per-cent annualized rate during the second quarter, the Commerce Department said in its advance estimate of GDP on Thursday. Economists polled by Reuters had forecast GDP rebounding at a 0.5-per-cent rate.

The second quarter estimate brings the total contraction of the U.S. economy in the first half of the year to 1.3 per cent.

Two consecutive quarters of shrinking economic output is often regarded as an informal sign an economy has toppled into recession, yet it’s by no means an official definition, a point President Joe Biden’s administration has gone to great lengths to emphasize in recent days.

Earlier this week Mr. Biden pointed to the overall health of the American economy to dismiss recession speculation. “God willing, I don’t think we’re going to see a recession,” he told reporters.

The White House earlier sought to get ahead of recession talk by putting out a blog post titled “How Do Economists Determine Whether the Economy Is in a Recession?”

Republicans have accused the administration of trying to redefine what constitutes a recession. “Reality check,” the Republican National Committee tweeted Thursday morning. “You can’t change the definition of recession just because you might cause one.”

On Thursday, Treasury Secretary Janet Yellen continued to hammer the administration’s message after the latest GDP release.

“Most economists and most Americans have a similar definition of recession,” she said, pointing to mass layoffs, business closings and family budgets under immense strain.

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“In sum, a broad-based weakening of the economy. That’s not what we’re seeing now,” she said.

The semi-official arbiter of when recessions begin and end in the U.S. is the National Bureau of Economic Research, which defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

The NBER also considers a range of factors when assessing whether a slowdown meets the bar to be labelled a recession, including employment, incomes and consumer spending.

Many economists believe these other factors, in particular record-low unemployment levels, suggest recession talk is premature. For instance, during the first half of the year, American businesses added 2.7 million new jobs to their payrolls, even as the economy technically shrank.

“It’s hard to say the U.S. is in a recession when you have the tightest labour market in history,” said Beata Caranci, the chief economist at Toronto-Dominion Bank. “It doesn’t make sense.”

Ms. Caranci said the GDP report also carried a key reason for optimism in the details: American consumers have kept right on spending, despite punishing inflation rates.

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During the second quarter, consumer spending rose 1 per cent on an annualized basis after inflation, with consumers shifting from buying goods to services. Spending on durable goods was down 2.6 per cent, while services rose 4.1 per cent, according to the BEA.

Yet other economists believe the drop in economic output during the first half of the year reflects an outright downturn.

“Do I call this a technical recession? No, this is a recession,” said David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee and now a professor of economics at Dartmouth College. “The only question now is how long does it last and how deep can it go.”

For Prof. Blanchflower, the evidence this is a real recession lies in the sharp drop in American consumer confidence as measured by both the U.S. Conference Board and the University of Michigan.

According to an upcoming paper co-authored by Prof. Blanchflower in which the authors examined nearly 45 years of consumer confidence and unemployment data, “consumer expectations of future unemployment are highly predictive of rising unemployment.”

In a draft of that paper released last fall, the authors wrote that the sharp drop in consumer expectations over the previous six months suggested “the economy in the United States is entering recession now, even though unemployment and wage growth figures suggest otherwise.”

Even if the U.S. economy isn’t in a full recession yet, many worry the foundations are crumbling fast.

“The U.S. economy has lost a lot of steam and is very vulnerable to a real recession,” said Sal Guatieri, senior economist at BMO Capital Markets. While he, too, doesn’t see a recession happening when employment levels are so high, he’s watching for any sign of weakening payroll employment. That would feed into an outright contraction in consumer spending, raising the possibility of a recession significantly.

At present, Mr. Guatieri said the odds of a recession are 50-50. “It’s a pretty close call whether the U.S. is in a real recession now,” he said.

If a recession has begun, it will be many months before the eight economists who make up the NBER’s business cycle dating committee declare it. The committee takes what it calls a “retrospective” approach to dating the peaks and troughs of business cycles, which means many months can pass before a recession start is formally announced – sometimes after a recession has already ended.

Even so, the technical two-quarter yardstick for recessions has an impressive track record. The last two consecutive quarters during which the U.S. economy shrank and an official recession was not declared occurred in 1947.

The question of whether this is a full-on U.S. recession or a technical one is more than semantics for Canadians. A recession would have a “huge spillover effect” on Canada because the U.S. is our main trading partner, Mr. Guatieri said.

While Canada benefits from elevated commodity prices and a relatively weak loonie compared with the U.S. dollar, “if the U.S. flips into a recession, most likely Canada will follow.”

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