Definitions of Recession
Is there an official definition?
Journalist Clark Merrefield contacted me last week for a piece he was writing on the topic of recessions. His article appeared yesterday at The Journalist’s Resource. It’s titled “Are we in a recession? 4 things journalists should know when covering an economic downturn.”
In follow-on emails, Clark and I shared our pet peeves about sloppy journalist reporting on numbers. One of his is in #1 of his 4 tips: “Clarify the difference between quarterly changes and annual rates, especially in headlines.” That’s certainly high on my list.
While he and I agreed that the NBER’s Business Cycle Dating Committee is an important arbiter of whether a recession occurred, we disagreed, as you can see from his article, about whether its definition is the official one.
In response to his original question to me about how economists came up with the “two quarters in a row of negative GDP growth” definition, I wrote:
The answer is that I don’t know. When I taught macro, which I did as early as 1975 and as late as 2014, I would tell my students that the the “two consecutive quarters of negative growth” was economists’ “seat-of-the-pants” definition. But I don’t know where I got it. The “seat of the pants” is my term because I knew all along that it’s not the technical definition. Of course, there’s no official definition. The 8 economists with NBER are stating their opinions. They’re informed opinions but they’re opinions, nevertheless. They have no official status.
In his article referenced above, Clark writes:
It’s not a recession until the Business Cycle Dating Committee of the National Bureau of Economic Research says it is. The nonprofit economic research organization, based in Cambridge, Mass., determines when recessions start and end. Its purpose is to establish the historical record for recessions, not to rush to say whether or not the U.S. economy is currently in one. The White House calls the Business Cycle Dating Committee the “official recession scorekeeper.”
That’s too strong. Yes, it’s true that the committee “determines when recessions start and end.” But that doesn’t mean that their determination is official. Thus my statement above.
Moreover, there’s a tense problem in Clark’s statement of the issue. He writes: “It’s not a recession until the Business Cycle Dating Committee of the National Bureau of Economic Research says it is.” That cannot be true. As is well known, and as he points out, the NBER comes to its conclusion with a lag. Let’s say that it announces in December 2022 that a recession started in March 2022. To say that it’s not a recession until the NBER says it is is to say that it’s not a recession until December 2022. I think Clark meant to say “It’s not a recession unless the Business Cycle Dating Committee of the National Bureau of Economic Research says it is.” That’s a pretty different statement.
I think also that we shouldn’t get stuck in the weeds and should remember why so many economists use the “seat of the pants” definition of “two consecutive quarters of negative growth.” It’s because the NBER committee takes so long that its dating of recessions has limited usefulness. Economists want to know more quickly. Various economists have noted that, as economist Matt Rousu put it, “In the past 75 years, when the nation’s GDP has dropped in two successive quarters, it has been classified as a recession.”
Will this one be different? I don’t know. But I’ll probably know before the NBER makes its announcement.
Note: Here’s an excellent article on the issue from Phil Magness. It’s titled “Biden Borrows the Nixon Playbook on Recessions,” AIER, August 1, 2022.
And here’s Phil’s op/ed in the Wall Street Journal, “A Recession by Any Other Name,” WSJ, July 27, 2022 (July 28 print edition.) A key quote:
Economists have long defined a recession as “a period in which real GDP declines for at least two consecutive quarters,” to quote the popular economics textbook by Nobel laureates Paul Samuelson and William Nordhaus.
Update: Clark has changed the language to address my criticism and has done so with integrity, putting a note at the bottom explaining the change.