Weekend Trivia: What Is The Definition Of A Recession?

As a recent article in the Financial Times explained, there is a simple answer and a more complex answer:


"When is it on and when is it over? The arcane art of cycle dating

The common definition of a recession is two successive quarters of negative economic growth. However, the formal definition is more complex.

The Business Cycle Dating Committee of the National Bureau of Economic Research in the US is charged with deciding when recessions begin and end. The committee is made up of top economists operating independently of the government and is chaired by Robert Hall, a professor at Stanford.

It regards growth in gross domestic product in real terms (adjusting for inflation) as the "single best measure" of economic activity. But it does not rely exclusively on GDP statistics, for a number of reasons. The Bureau of Economic Analysis publishes GDP estimates only quarterly, while the committee works on a monthly basis. Moreover, the GDP estimates are extensively revised over a number of years.

So the Business Cycle Dating Committee uses other metrics as well. It puts "particular emphasis" on personal income (in real terms less transfer payments) and employment. In addition it looks at industrial production and wholesale and retail sales. It also weighs estimates of monthly GDP growth by private sector forecasters.

The last recession, according to the committee, began in March 2001 and ended in November of that year.

If the US falls into a sharp or prolonged recession this time, the judgment will be easy. However, if output growth stalls but jobs and incomes continue to grow, the committee could face a tough decision as to whether to term the slowdown of late 2007/early 2008 a recession or not.

Do not expect an answer soon. The committee normally declares the start of a recession six to 18 months after the event. Since recessions typically last less than a year, this means a recession can be over before it has officially begun."