What is a recession? This question is prompted by an exchange over on Twitter. First, the St. Louis Fed tweeted:
Then Kathleen Hays (Twitter profile: The Hays Advantage, Host, Bloomberg Radio. Economy, finance, markets, politics. Monday-Friday 12-3pm ET – The Econoqueen lives!) asked:
Hmmm. It’s been a while since anyone asked this question, so it’s probably time to review the rules. Off the top, everyone concedes that the NBER Business Cycles Committee is the arbiter of when recessions begin and end. Their statement of September 20, 2010 said the recession ended in June, 2009.
I’ve written about this before, but it bears repeating: the U.S. unemployment rate has been above 8 percent since January, 2009. The labor force participation rate is around 60%, the lowest level in three decades (specifically, since May, 1973). These are not signs of a healthy economy. It’s my opinion that the recession never really ended. Other, better-known, economists agree. On September 2, 2011, Ken Rogoff said, “We have never left the recession by any reasonable measure. If you’re 10 feet below water, and you come up a foot, you’re still drowning. The question of whether we are growing at 1% or falling at 1% is not the big issue. We’re in a different animal.” And there’s this from CNN:
“John Silvia, chief economist for Wells Fargo Securities, said the economy remains at risk as long as most households are struggling with weak wages, rising prices and the loss of household wealth.
Silvia puts the chance of a new recession at 30% to 40%, up from 20% to 30% before Friday’s jobs report.
“A significant number of Americans have never seen a recovery,” Silvia said. “We’re just skating on really thin ice. We can’t take another shot.”
Technically, the recession ended in June 2009, according to the official definition from the National Bureau of Economic Research. But that group takes into account a wide range of economic indicators.
For the average household, the Great Recession never ended. In fact, eight in 10 Americans think we’re still on one, according to a newCNN/ORC poll.”
What Defines a Recession?
Once upon a time, defining a recession was easy: two consecutive calendar quarters of declining real GDP. That’s easy to understand and transparent. Economists understood the definition’s strengths (simplicity, transparency) and weaknesses (using a single variable to define a recession is not a good idea).
Enter the NBER, Here’s what they have to say about business cycles:
“The NBER’s Business Cycle Dating Committee maintains a chronology of the U.S. business cycle. The chronology comprises alternating dates of peaks and troughs in economic activity. A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years.
In both recessions and expansions, brief reversals in economic activity may occur-a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth. The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction. The most recent example of such a judgment that was less than obvious was in 1980-1982, when the Committee determined that the contraction that began in 1981 was not a continuation of the one that began in 1980, but rather a separate full recession.
The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP). The Committee’s use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs.”
The Committee’s FAQ is also instructive in explaining why they no longer only look for two quarters of declining real GDP.
Let me translate. Paraphrasing Humpty Dumpty’s conversation with Alice, ‘ “When I use the word recession,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.“
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master— that’s all.” ‘
(from Through the Looking Glass, and What Alice Found There, Lewis Carroll, 1871, ch. 6)
The NBER Business Cycles committee includes many smart economists, most of whom I admire greatly:
“Robert Hall, Chair — Director of NBER’s Program of Research on Economic Fluctuations and Growth and Professor, Stanford University
Martin Feldstein — President Emeritus of NBER and Professor, Harvard Univerity
Jeffrey Frankel — Director of NBER’s Program on International Finance and Macroeconomics and Professor, Harvard University
Robert J. Gordon — NBER Research Associate and Professor, Northwestern University
James Poterba — President of NBER and Professor, M.I.T.
Christina Romer — Co-Director of NBER’s Program on Monetary Economics and Professor, University of California, Berkeley
David Romer — Co-Director of NBER’s Program on Monetary Economics and Professor, University of California, Berkeley
James H. Stock — Research Associate in the NBER’s Monetary Economics Program and Professor, Harvard University
Mark W. Watson — Research Associate in the NBER’s Economic Fluctuations and Growth Program and Professor, Princeton University”
But, after all, the Committee changed the definition of a recession, making it less transparent and more complicated. A cynic might note that this change creates a demand for the services of economists to serve on the Business Cycles Committee. But the change has been made. I interpret that to mean that my opinion is as good as theirs.
The recession of 2008 has never ended. Any talk of a “double-dip” is meaningless.