What Exactly Is a Recession—and Are We in One?
The common definition of a recession, and the one most frequently cited in the media, is a period of two consecutive quarterly declines in real GDP. While historically this definition has held pretty close to true, it is more of shorthand than the precise definition. The actual definition of a recession as given by the NBER, the committee responsible for determining and dating official recessions, is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale–retail sales.” The definition is fairly vague, which explains why many prefer the shorthand definition, but the idea is fairly simple. A recession is any period when economic activity experiences a prolonged and widespread decline.
The fact that the definition is vague and open to interpretation is precisely why the NBER committee is in charge of determining the exact dates of such periods. Moreover, our knowledge about the current state of the economy is limited to volatile and frequently revised statistics, so even experts may have a difficult time defining a period of recession.
When determining whether or not a recession has occurred, the NBER places significant weight on the BEA’s estimates of GDP, since GDP is considered to be the best measure of aggregate economic activity. Unfortunately, GDP numbers are revised substantially for years after their first release, and their initial values must be considered provisional. Another problem with using only GDP to determine a recession is that it is released quarterly, but the NBER dating committee pinpoints the onset of recessions to a single month. Because of these problems with GDP data, the NBER looks at four main monthly indicators: personal income less transfer payments in real terms, employment, industrial production, and real manufacturing and wholesale—retail sales, with the first two being of particular importance. The dating committee may consider other indicators as well, and it does look at monthly estimates of GDP, taking into consideration their volatility and probable revision.
With the committee’s basic dating procedure in mind one can look at the various indicators they use and try to get an idea of where we currently stand.
Looking at the two main indicators considered by the NBER, it appears that the current period is fairly consistent with a recession. Year–over–year growth in personal income excluding transfer payments has fallen into negative territory in each of the last three months. Employment has been falling since January, and its 12–month growth rate recently dipped into negative territory as well. The industrial production picture is also beginning to show signs consistent with past recessions, as are the wholesale–retail sales data, though the duration and depth of all of these declines does leave some room for doubt.
So are we in a recession? The data are certainly indicating a slowdown in economic activity. But we’ll leave it up to the experts to make the final determination as to whether or not the scope and depth of this slowdown are large enough to constitute an official recession. Perhaps the most important thing to realize about a recession is that it is merely a technical term. Whether the NBER officially deems this period a recession or not, there is little doubt that the economy is struggling and the challenges ahead are significant.