Recession Indicators: The Definition of Recession

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FRED Real GDI helps determine the Definition of Recession
US Real Gross Domestic Income is a key Definition of Recession determinant

What is the definition of recession?

Some say the definition of recession is in the eye of the beholder. Colloquially, one might call things just ‘a slowdown’ when you still have your job, and I have my job, whereas it becomes a recession to you when you lose your job, and vice versa.

But what about the official definition of recession?

The Official Definition Recession

Well, this is not so easy, either. While not so much in the eye of the beholder, it still depends a little bit on which expert you ask. In many countries, politicians and news media still rely on the “it takes two consecutive quarters of negative GDP to be an official recession” rule of thumb.

While it is true that most serious downturns are accompanied by two consecutive quarters of negative GDP, not all are. So what do you call a serious downturn that has just as horrid a negative impact on things like employment, domestic income, manufacturing, trade and sales, but for whatever reason, lacks two consecutive negative GDP quarters?

Answer: Yep, you call it a recession. Because it is one, and that’s not just being sloppy with numbers to fit a narrative. For various reasons, not all recessions have two negative quarters.

Why? How does this happen?

It is fair to say a serious downturn has to be not only serious enough, but indeed long enough, to qualify as more than an annoying pothole in the road.

Most eggheads agree that the length of decline across key economic indicators needs to be several months . So, maybe about at least four months and longer, although this, too, is not set in stone. (It’s not just for how long the car is in the ditch, but also how deep the ditch it fell into, is, and vice versa).

Also, if one was to stick to the two consecutive negative GDP quarter rule, what happens when, say, a recession starts at the end of a quarter (Let’s use March of Q1 in this example), and ends about the middle of another quarter (Let’s use August of Q3 in this example), but GDP on a quarterly basis was not negative back-to-back, but was on a monthly basis, for fully six months, in this hypothetical.

Would we not call that a recession? Of course we would!

Here in the United States we have an independent organization act as the official arbiter of recessions and expansions. This group of super eggheads is known as the National Bureau of Economic Research, or NBER. But don’t hold your breath waiting for them to declare the current (as of March, 2020) severe downturn a recession. The NBER is very methodical, never wanting to have to make corrections to their dating after they announce. As such, they actually have a history of announcing the start and ends of recessions long after the fact.

Then how do we know if we’re in recession?

That, detective, is the right question.

There are four primary datasets to watch, and several others worth considering in the mix. In the following pages linked to this main page describing the definition of recession, we will track and detail them all, one page at a time.

NBER Definition of Recession:

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.