Making Sense of the Mixed-Signal Economy

GDP is falling, prices are rising, and unemployment is low. Welcome to the full employment recession.

Recently the Bureau of Labor Statistics released its first estimate for gross domestic product (GDP) growth in the second quarter. The number was -0.9%. That’s the second consecutive quarter of negative GDP growth. That’s a recession.

But with strong job growth and strong spending in luxury consumer spending, is the United States really in a recession?

During every recession, economic output falls. When that happens, businesses lay off some workers. Unemployment rises. As the unemployed see their incomes fall, demand in the economy falls, leading to less output being produced and more layoffs. Unemployment usually rises by 2 to 3 percentage points from pre-recession highs.

This year, total output has declined at about a 2.5% rate since January. With that decrease, unemployment should be well above 4%, which is what economists generally believe is the full employment level.

Yet the unemployment rate has remained at 3.6% — and on Friday, even leading economists were shocked by the robust 528,000 jobs that were added, bringing U.S. unemployment down to 3.5%.

Equally confounding is that the economy has added nearly 3 million jobs since January. How can…