With the change in real gross domestic product turning negative in the first quarter of this year, a question keeps popping up: Are we headed into a recession?

While the National Bureau of Economic Research is the official arbiter of when recessions start and end, the definition is the economy contracts for two consecutive quarters.

Real GDP growth in the first quarter came in at a seasonally adjusted annual rate of negative 1.4 percent.

This was a tricky set of data with positives and negatives. Personal consumption, business investment and residential investment all grew in the first quarter. In fact, personal consumption and business investment growth improved in each of the last two quarters, which make for positive, albeit short, trends. Exports, government expenditures and gross investment declined, as did private inventories. Notable declines in government consumption and investment for two straight quarters seem unlikely to persist. Export growth has been erratic with swings between increases and declines over the past five quarters after big declines when the pandemic first hit and then a subsequent snapback. Raging inflation creates uncertainty in terms of investment, interest rates and incomes. Of course, the economy also struggles with ongoing supply chain challenges, international uncertainties and tight labor markets. The latest jobs report served up contradictory data about where the labor market was in April.

After laying out this messy and contradictory take on the economy, we turn to policymaking. Policies matter when it comes to the economy. The question: Are policies pointed in a pro-growth or anti-growth direction? Whether looking broadly at a recovery from the pandemic and getting back on a strong growth track; zeroing in on the investment, innovation and choices needed to alleviate supply chain woes; or considering inflation, the need for policymaking to incentivize entrepreneurship, investment and working should be clear. At a time when policymakers should debate how to provide substantive and permanent tax relief, the exact opposite has occurred with the Joe Biden administration and Congress.

Higher tax threats. A pro-growth policy agenda should reduce capital gains tax, including indexing gains for inflation to cut the real rate, to incentivize entrepreneurship and investment as well as improve and make permanent the small business provisions in the Tax Cuts and Jobs Act. Cutting individual income tax rates also would be a big plus for most businesses. Instead, President Biden and various members of Congress continue to push for higher tax rates on capital gains, personal income and corporate income.

Imposing new costs and burdens on businesses through regulation. Deregulation and regulatory relief should be an important part of the policy agenda, including sunsetting regulations and undertaking a comprehensive review to eliminate costly, wasteful and out-of-date regulations. Keep in mind regulatory burdens always fall hardest on small businesses. However, the Biden administration has turned back some important regulatory reforms made during the last administration. This administration and Congress continue to push for a massive expansion of regulation in energy, health care, labor, pharmaceuticals and technology.

Faltering on trade. Advancing free trade — reducing government barriers to trading — is vital for consumers to reduce price and expand choices and for businesses and workers to reduce the costs of inputs and expand opportunities in global markets. Yet, the Biden agenda differs little from the Trump agenda as each have favored protectionist measures.

Excessive government spending. Federal spending must be brought under control so more resources are left in the private sector rather than drained by taxes or borrowed from productive private sector endeavors. If Biden budget projections are in the ballpark, federal outlays will run at 24.5 percent of GDP for an extended period. That has never happened before in peacetime history, marking a major expansion in federal government.

A fumbling Fed. Finally, monetary policy should focus on price stability. The Fed largely lost track of its price stability imperative back in 2008 and subsequently ran money policy so loose it was without historic precedence. Now that inflation runs red hot, the Fed has woken up, but seems intent on trying to rein in inflation by undermining economic growth via punitive interest rate increases. 

In the end, a recession looms as a serious possibility — with negative growth continuing into the second quarter or possibly a bit further down the road.
The clearest reason why the possibility of a recession must factor into decisions by businesses, entrepreneurs and investors, as well as families and individuals, is a precarious economic situation pushed in the wrong direction by misguided policymaking imposed or threatened by the Biden administration, Congress and the Fed.