Are we in a recession?
This post originally by Alexander Muse. Posted with permission.
In the United States, recessions are defined as two consecutive quarters of negative GDP growth. During my lifetime (at least the part I can recall) there have been two recessions in the United States (81-82, 90-91). Between November 2001 and November 2002 we had two quarters of alternating decline and weak growth and despite the fact that we never had two consecutive quarters of negative GDP growth the NBER classifies it as a recession as well, huh? Whether or not we are in a recession shouldn’t be a subjective measure, instead it is a very well defined term - two quarter of consequitve negative GDP growth, period.
Over the last year I have heard the television news repeat over and over that we are in a recession. Almost all members of Congress suggest we are in a recession. Anyone who dares to suggest we may NOT be in a recession is quickly called an idiot and dismissed. To be clear, I am not arguing that we are not in the midst of the perfect storm as it relates to our economy (oil prices, food prices, inflation, falling housing prices, mortgage meltdown, tanking dollar and so on). I am suggesting that we either a) invent a new term for our current situation or b) agree on a new defition of the word recession.
The recession proponents were dealt a severe blow this morning when the Commerce Department reported that GDP increased at an annual rate of 1.9% in the last quarter (April-to-June). This was an improvement over the first quarter of the year that came in at .9% growth. Nope, we are NOT in a recession according to the definition of the word.
Option One: Perhaps we should conduct large scale national polls each quarter asking Americans if they ‘FEEL’ we are in a recession. We could also have a group of super-delegates (i.e. celebrities, economist and politicians) whose votes would could 10,000x of a normal American (i.e. much like the Democratic Primary). The ‘FEELINGS’ of the nation+super delegates would determine the issue and we could put the whole ‘are we in a recession?’ question to rest. Option Two: Or, on the other hand, we could simply agree the economy sucks and only call it a recession once we have had two consecutive quarters of negative growth. Option Three: Keep up the maddening debate we have been having for the last year. What is your vote (let me know if you are a super-delegate so I can multiply your vote)?
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August 2nd, 2008 at 5:38 pm
It would be nice if its actually that simple. Like most things, however, it is not. The National Bureau of Economic Research, the folks who actually are the official ‘deciders’ regarding recessions have a more complex definition.
This is their definition: “A recession 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 whole concept of a recession being defined by a hard and fast rule involving two quarters of decline is a media invention. In the case of two quarters of contraction there is absolutely, positively, without a doubt, a recession occurring.
In reality, a recession can occur when a segment of the economy (like the current record profits in the Energy Sector) is booming while several other sectors like travel and manufacturing and auto sales are in decline.
The National Bureau of Economic Research has an excellent FAQ they put together after the last recession to help people better understand the real definition of a recession and enable them to look past the media pundit’s ratings based calls that you seem to be upset with now. Check out http://www.nber.org/cycles/recessions.html for more information.