Defining Recessions
Are we in a recession? We touched on this question last week and it’s worth revisiting for a few minutes this morning. Recessions are nebulous things, difficult to pin down in the moment, and everyone has an opinion. The dates and other specifics around a recession are important, however, so it’s good to understand some of the fundamentals.
There are multiple ways to define a recession. The typical back of the envelope method is seeing at least two consecutive quarters of declining GDP. The first quarter of this year saw GDP fall over 1%. The second quarter was on track to be flat, or perhaps slightly negative and, if so, you could say we’re in a recession now. Seems pretty simple. But as with most simple things there’s always more to the story.
For starters, most of us view the question from a non-academic perspective anyway. If we feel like we’re in a recession, we’re in one. Opinions about this are perhaps informed by the feeling of moving backward due to inflation and the sense of inevitability it brings. For others it’s the loss of a job setting them back for weeks if not months. Others bake politics and overall sentiment into how they see our economy getting better or worse. By this sort of reckoning some suggest that we’ve been in a recession for years. Again, lots of opinions. Last Friday was the 43rd anniversary of President Carter’s “malaise” speech and, if nothing else, listening to it in our current environment provides an eerie reminder of just how closely history can rhyme.
But there’s a broader, formal definition of recession that’s generally considered correct. A committee within the National Bureau of Economic Research (NBER) looks for a “significant decline in economic activity that is spread across the country and lasts more than a few months” before calling the beginning and ending of each recession. NBER tracks a variety of information and focuses on the “direction of change” to find the peaks and troughs occurring over time within our economic cycle. All this is dependent on data that takes time to assemble and is why recessions are identified only after the fact, sometimes well after because the data often go through multiple revisions. NBER’s work is also subjective because they decide how important some metrics are versus others at a given point in time.
That brings us to my main point this morning. Recessions often follow a general playbook but no two are exactly alike. And our next one, whether it’s now and NBER just hasn’t named it yet, or is down the road, it’s likely to be very different from prior recessions due to the dislocations (for lack of a better term) caused primarily by our response to the pandemic. For example, there’s a large number of available jobs in our economy even as economic activity slows. No prior recession since WWII has seen this combo. Is the job market just waiting to roll over? Why are companies still posting jobs if, as some suggest, the outlook is so poor?
Along these lines, here’s a five-minute video that does a great job describing the complexity of our current environment. Let me know if you get blocked by the paywall and I can try to send you the link direct from my account.
And here’s a link to FAQs on NBER’s website to get more information on how they do what they do.
Have questions? Ask me. I can help.
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