As inflationary pressures continue to drive higher prices for US families, policymakers and economists continue to debate whether the United States is entering, has entered, or will soon enter a recession.
This debate is complicated as current economic indicators tend to disagree with each other and deviate from historical recessionary trends, obscuring a definitive answer. Although recent developments in the US economy meet the widely held two-quarter rule, according to which two consecutive quarters of contracting gross domestic product can portend a recession, it is far from clear whether the economy is actually contracting, especially considering that this is very robust current job market. Just last week, the US Bureau of Labor Statistics announced that the US economy added 528,000 jobs in July 2022, an extremely strong figure usually associated with a booming economy.
So what is a recession and how do we know when the US economy is actually in one? Who decides when it starts and ends, and why is recession dating important? This fact sheet answers these questions and more to shed light on how recessions are dated and why dating a recession is a complicated and necessary economic calculation.
What is a recession?
According to the National Bureau of Economic Research, the company that analyzes US business cycles, there are three characteristics that define a recession: Economic activity must be declining significantly, across the economy, and for more than a few months. More accurate:
- A recession is essentially an economic contraction. That is, it indicates that the economy is actively shrinking. It’s not an analysis of the actual health of the economy, but rather of the direction the economy is moving. When the economy is bad, it is in recession. When the economy gets better — even if it’s very slow or from a bad starting point — it expands.
- A number of economic indicators go into the calculations of this activity, but in general the result reflects gross domestic product. Some indicators that NBER specifically mentions are personal income net of transfers, non-farm employment, consumption levels, retail sales, employment and industrial production, although this is not an exhaustive list.
What is the difference between a recession and a depression?
There is no official definition of depression. The term “depression” is usually reserved for particularly deep recessions. A fall in GDP of 10 percent or more is a rule of thumb, and most people think that depressions last longer than recessions, which are usually relatively brief. The previous US economic crisis was the Great Depression of the 1930s.
The Great Recession was not deep enough to be considered a depression, even though it was the deepest US downturn since the Great Depression. The COVID-19 recession may have been deep enough to be considered a depression, but it was too short-lived.
Who decides when a recession begins and ends?
In the United States, the National Bureau of Economic Research has a standing committee that has been officially responsible for recession data since 1978. (However, the committee does not declare or date depression.) The NBER President determines who sits on the committee, which currently includes Robert Hall of Stanford University, Robert J. Gordon of Northwestern University, James Poterba of the Massachusetts Institute of Technology, Valerie Ramey from the University of California, San Diego, Christina Romer and David Romer from UC Berkeley, James Stock from Harvard University and Mark W. Watson from Princeton University. Committee members are typically macroeconomists and other researchers who study the business cycle.
Other important details are:
- NBER is a private non-profit research organization, not a government entity. However, the recession data calculated by NBER is considered official and recognized by all US federal economic agencies, including the US Bureau of Labor Statistics, the US Bureau of Economic Analysis, and others.
- Other countries have adopted a similar model using official business cycle dating committees, including Japan, France, Spain, Brazil and Canada. The United States is not unusual or unique in this regard, although committees in most other countries do not have as much official support as the NBER committee.
How does recession dating work?
The NBER committee identifies a peak month in the economy using the above economic indicators; the recession begins the month after this peak. The committee then identifies a trough month, usually several months after the trough occurred; this valley month is considered the end of the recession.
For example, when dating the COVID-19 recession, the committee labeled the peak month as February 2020, meaning the start of the recession was dated March 2020. The trough month was April 2020, which NBER considers inclusive, so the recession started in early March 2020 and ended in late April 2020, implying a two-month recession.
Why not use the two quarters rule?
While the two-quarters rule is a handy monitoring tool for the more casual economic watcher, economists do not use it when officially analyzing business cycles and dating recessions because it is not a consistent method of dating recessions. The 2001 recession, for example, was not marked by two consecutive quarters of slowing economic growth. Other indicators pointed to a contraction in the economy, leading NBER to call it a recession, despite shrinking just a quarter of GDP.
There can also be measurement errors in GDP calculations, which is why NBER does not use GDP alone to date the recession. The 2008 recession, for example, like the 2001 recession at the time, was not marked by two consecutive quarters of decline, although subsequent revisions of GDP over the period showed negative growth. In 2008, NBER decided there was a recession, even though the Bureau of Economic Analysis showed positive GDP growth because the committee could see from other indicators that the economy was doing very badly.
Additionally, countries applying the two-quarters rule sometimes have to retrospectively “roll back” a recession date if subsequent revisions show that GDP has in fact not declined over a given period.
What About the Sahm Rule or Alternative Methods of Recession Dating?
The Sahm Rule states that an economy has entered a recession when the 3-month average unemployment rate has been half a percentage point or more above its minimum over the past 12 months. It was not originally intended as a means of dating recessions. Rather, it was intended to predict recessions before they happen, so policymakers can respond appropriately, or as a trigger for automatic stabilizers to kick in.
The Sahm rule is a better predictor of recessions than some other commonly proposed methods — for example, the inverted yield curve, where the market rate on short-term borrowing exceeds that on long-term borrowing. Applying the Sahm rule to past recessions results in very few false positives.
Some economists—such as Christina and David Romer of UC Berkeley—prefer deterministic models that remove components of human judgment. Others tend to use slightly different sets of aggregate economic indicators.
The recessions these alternative models produce are usually very similar to those identified by the NBER dating committee. They are often touted as faster than the NBER method, which is often decided with a significant delay to avoid having to change recession data due to new or recalculated data. That is, other methods can provide data for the recession just a few months after the bottom, while the NBER method sometimes takes a year or more.
How does inequality affect recession data?
Inequality has a significant impact on recession dating. Calculations of economic growth are typically performed at an aggregate level, meaning that some demographic groups or geographic areas may still experience economic decline even as the overall economy grows and is therefore considered to be expanding. That data aggregation, coupled with the fact that more and more wealth and income is being controlled by a smaller group of people, means that an expansion for the top earners overall can look like an expansion for the economy as a whole — even when it’s not.
In fact, this is similar to what happened during the Great Recession of 2007-2009. Initially, the bottom 50 percent of the income distribution fared relatively well, bolstered by stimulus packages and increased use of income support programs and other government transfers. But when those programs ended and US policymakers turned to austerity, the bottom 50 percent suffered. (See Figure 1.)
illustration 1
As Figure 1 shows, the bottom 50 percent entered a recession specific to them as a group that lasted at least from 2010 to 2013. this period is not a recession.
Why is recession dating important?
Different stakeholders have different reasons for caring about recession dating. It’s important for macroeconomists who study the causes and consequences of recessions and need to know how to indicate whether certain observations in their data occur before, during, or after a downturn. More accurate:
- Recessions can affect economic activity, as well as budgetary and business decisions – all of which can also affect inflation.
- Recession dating is not meant to be a signal to the public or policy makers, although it does have obvious policy implications. A shared understanding of when or if a recession will occur eliminates the possibility of politicians obscuring the reality of the economic situation for US workers and households for political gain.
So is the US economy currently in recession?
The short answer is that it’s hard to tell. While the two-quarters rule suggests this is the case, a recession has never been declared without job losses either – and the US job market is adding hundreds of thousands of jobs each month.
While GDP has shrunk over the past two quarters, a related indicator of economic growth — gross domestic income, a measure of overall output that aggregates income rather than output — suggests the economy is growing. GDP and GDI should be the same, but there is always a discrepancy between the two. Currently, the two metrics offer very different views of the economy, with GDP suggesting the economy is shrinking while GDI indicates the opposite.
What is clear is that when the US economy enters a recession – or when it already is and just hasn’t been announced yet – it will likely look very different than previous recessions.
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