Update: Here is an article by Lakshman Achuthan and Anirvan Banerji that addresses the definition of recession.
The Risk of Redefining a RecessionNEW YORK (CNNMoney.com) -- Recession? Or just a slowdown? Some will tell you it doesn't much matter - that it's a distinction without a difference. Nothing could be further from the truth - or as dangerous a delusion.Ignorance about recessions has taken hold because of a simplistic idea that a recession is two successive quarterly declines in gross domestic product (GDP), a measure of the nation's output.
The idea originated in a 1974 New York Times article by Julius Shiskin, who provided a laundry list of recession-spotting rules of thumb, including two down quarters of GDP. Over the years the rest of his rules somehow dropped away, leaving behind only "two down quarters of GDP."
Like most rules of thumb, it's far from perfect. It failed in the 2001 recession, for example. At the time and until July 2002, data showed just one down quarter of GDP, leading policy makers to claim there had been no recession. Yet, later that month, revisions showed GDP down for three straight quarters. Complicating matters further, with the benefit of time, we now know that GDP actually zigzagged between negative and positive readings, never showing two negative quarters in a row.
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Clearly, there are times when the reality of the economy outside your window is harsher than GDP might imply.
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Any trustworthy definition of recession needs to encompass the key elements of the recessionary vicious cycle - output, employment, income and sales.
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A recession is a self-reinforcing downturn in economic activity, when a drop in spending leads to cutbacks in production and thus jobs, triggering a loss of income that spreads across the country and from industry to industry, hurting sales and in turn feeding back into a further drop in production - in effect a vicious cycle.
That's why the proper definition of recession cannot be limited to GDP and industrial production, but must also include jobs, income and spending, all spiraling down in concert.
To keep it simple, just look for the "Three P's" - a pronounced, pervasive and persistent downturn in the broad measures of those factors.
David,
ReplyDeleteYour CNN article is better than most. But, it misses the obvious regarding GDP data.
Quoting an excerpt from my own blog:
"Many in the media have noted that the recession of 2001 (03/01 to 11/01) was the only recession ever which did not witness at least two consecutive quarters of negative GDP growth.
However, the media have been less forthcoming in noting that leading up to and through the recession of 2001, three out of five quarters produced negative GDP growth. More importantly, the first three quarters of 2001 produced a net negative GDP growth of -0.7%.
By contrast, every quarter since the recession of 2001, including the advance data on Q1 of 2008, has produced positive GDP growth."
The rest of that blog entry is found here.
I googled recession in 2008 and found your blog. I must pose a question... maybe you could help. Isn't it a possibility that we need to redefine the term "recession" because we have moved to a more global economy & our GDP no longer fully reflects the true economic pressures felt by the citizens of the US? And if a redefinition is necessary, how should we define "recession"????
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