What is a Recession, Who Decides When It Starts, and When Do They Decide?
Order Code RS22793
January 23, 2008
What is a Recession, Who Decides When It
Starts, and When Do They Decide?
Brian W. Cashell
Specialist in Macroeconomic Policy
Government and Finance Division
Summary
A recession is one of several discrete phases in the overall business cycle. The term
may often be used loosely to describe an economy that is slowing down or characterized
by weakness in at least one major sector like the housing market. When used by
economists, “recession” means a significant decline in overall economic activity that
lasts more than a few months. The National Bureau of Economic Research (NBER)
business cycle dating committee is the generally recognized arbiter of the dates of the
beginnings and ends of recessions. As with all statistics, it takes some time to compile
the data, which means they are only available after the events they describe. Moreover,
because it takes time to discern changes in trends given the usual month-to-month
volatility in economic indicators, and because the data are subject to revision, it takes
some time before the dating committee can agree that a recession began at a certain date.
It can be a year or more after the fact that the dating committee announces the date of
the beginning of a recession.
At the moment, there seems to be a growing sentiment that the U.S. economy is in,
or is headed into, a recession. All that seems necessary for the word “recession” to be
heard in public discourse is for economic growth to slow, for the unemployment rate to
rise, or for there to be some turmoil in a sector of the economy large enough to affect
large numbers of households. The term may often be used loosely to describe an
economy that is slowing down or characterized by weakness in at least one major sector
like the housing market. When economists use the term, however, they try to do so
consistently. Recessions typically have common characteristics and so economists try to
identify the beginning and ending dates of recessions in order to further their overall
understanding of the economy.
What is a Recession?
A recession is one of several discrete phases in the overall business cycle. The
beginning of a recession is known as a business cycle “peak,” and the end of a recession
is referred to as a business cycle “trough.” In 1946, Arthur Burns and Wesley Mitchell
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published a study of business cycles and offered a definition intended as a guide for
further study:
Business cycles are a type of fluctuation found in the aggregate economic activity of
nations that organize their work mainly in business enterprises: a cycle consists of
expansions occurring at about the same time in many economic activities, followed
by similarly general recessions, contractions, and revivals which merge into the
expansion phase of the next cycle.1
This definition requires both expansions and recessions to be apparent in many economic
activities at about the same time, which would seem to exclude an economy exhibiting
weakness in a single market.
More recently, economists at the National Bureau of Economic Research (NBER),
issued a memo with a slightly more precise 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. A recession begins just
after the economy reaches a peak of activity and ends as the economy reaches its
trough. Between trough and peak, the economy is in an expansion. Expansion is the
normal state of the economy; most recessions are brief and they have been rare in
recent decades.2
This is the generally accepted view among economists of what constitutes an
economic recession. There is also a commonly cited “rule of thumb” that is referred to in
the press. That rule is that a recession is two consecutive quarterly declines in real gross
domestic product (GDP). But this rule does not always apply. For example, there was
a recession beginning in March 2001 and ending in November 2001 that was not
characterized by two successive quarterly declines in real GDP.
In any case, an important distinction is that a recession is a period of declining output
and not just a period of slower economic growth. It is possible for GDP growth to be
positive yet so slow that the unemployment rate rises. This is sometimes referred to as
a “growth recession.”
Who Decides When the U.S. Economy is in a Recession?
Among economists, the NBER is the generally accepted arbiter of business cycle
turning points.3 The NBER is a private nonprofit and nonpartisan organization that was
founded in 1920. In the beginning its focus was on the macroeconomy, business cycles,
and long-term growth, but now it seeks to promote research on a wide variety of topics.
For many years, the NBER itself determined the dates of swings in the business cycle.
1 Arthur F. Burns and Wesley C. Mitchell, Measuring Business Cycles, National Bureau of
Economic Research, 1946, p. 3.
2 Business Cycle Dating Committee, Memo, National Bureau of Economic Research, January 7,
2008, 3 pp. Available on the Internet at [http://www.nber.org/cycles/jan08bcdc_memo.html].
3 The NBER website is at [http://www.nber.org].
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In 1978, however, a separate business cycle dating committee was formed. The members
of the committee are appointed by the president of the NBER, and they are now
responsible for determining the dates of the beginnings and ends of recessions.4 The
current members of this committee are as follows:
! Robert Hall, Chair — Director of NBER’s Program of Research on
Economic Fluctuations and Growth,
! Martin Feldstein — President of NBER,
! Jeffrey Frankel — Director of NBER’s Program on International Finance
and Macroeconomics,
! Robert J. Gordon — NBER Research Associate, and Professor at
Northwestern University,
! Christina and David Romer — Co-Directors of NBER’s Program on
Monetary Economics, and
! Victor Zarnowitz — NBER Research Associate and Professor Emeritus
at the University of Chicago.
If There Is a Recession, When Will We Know When It Started?
The most important indicator of economic conditions is growth in real GDP. GDP
is a quarterly measure, and thus there is a time lag between the first month that is reflected
in the data and the release of the data. For example, the first release of data for the first
calendar quarter of a given year does not occur until late April. The data from that release
is subject to revision in each of the next two months and may be revised later on as well.
It is not inconceivable that a first release of data that showed a decline in real GDP would
later be revised to show an increase. Even so, those using the rule of thumb that two
successive quarterly declines in real GDP constitutes a recession would have to wait for
the release of the second quarter data in August to establish that a recession began at the
start of the year.
Because of the time lag associated with the release of GDP data, and because
business cycle turning points are associated with months rather than quarters, the dating
committee relies on a number of monthly economic indicators. Among the more
important monthly indicators the committee looks at are personal income, employment,
and industrial production. Even in the case of monthly indicators, it may require several
months of data to establish a change in trends.
When there is a recession, not all of the economic indicators will show a change in
trend at the same time. Historically, some indicators such as housing starts and the stock
market tend to slow or decline in advance of a recession, and some like the unemployment
rate tend to react to changing conditions with a lag.
With all statistics it takes some time to compile the data which means they are only
available after the events they describe. Moreover, because it takes time to discern
4 A working paper published by the Bureau of Economic Analysis found that “[t]he NBER dating
committee’s methodology appears to be very robust.” See Bruce T. Grimm, “Alternative
Measures of U.S. Economic Activity in Business Cycles and Business Cycle Dating,” Bureau of
Economic Analysis Working Paper 2005-05, August 2005, 14 pp.
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changes in trends given the usual month-to-month volatility in economic indicators, and
because the data are subject to revision, it takes some time before the dating committee
can agree that a recession (or an expansion) began at a certain date. Table 1 shows, for
recent business cycle peaks and troughs, the date of the turning point and the date when
the committee issued a release identifying the date of the turning point.
Table 1. Dates of Recent Business Cycle Turning Points and Dates
They Were Announced by the NBER
Date Turning Point Was
Months After
Turning Point
Date of Turning Point
Announced by NBER
Turning Point
peak
January 1980
June 3, 1980
5
trough
July 1980
July 8, 1981
12
peak
July 1981
January 6, 1982
6
trough
November 1982
July 8, 1983
8
peak
July 1990
April 25, 1991
9
trough
March 1991
December 22, 1992
21
peak
March 2001
November 26, 2001
8
trough
November 2001
July 17, 2003
20
Source: National Bureau of Economic Research.
The longest delay between the beginning of a new phase of the business cycle and
its announcement was when a recession was found to have ended in March 1991 but was
not announced until 21 months had passed. The shortest delay was five months after the
expansion ended in January 1980. Of the eight examples shown here, three were not
announced until at least a year had elapsed.
Rhetorical and Analytical Significance
While all recessions have unique characteristics, they also have many common
aspects. Thus, they are the object of economic analysis both individually and collectively.
Because they are undesirable, economists study them in the hope that they can advise
policymakers how to avoid them. To do so, it is important to agree on a chronology, and
it may not be an inconvenience to economists that it takes time to establish one.
Policymakers, on the other hand, are more concerned with the present and the
immediate future. If they hope to avert or mitigate the consequences of recession, they
cannot wait for an “official” declaration. By then the recession is likely to be history.
Although there can be a significant delay between the onset of a recession and the
dating committee determination, there is often little doubt that the economy is, or has
been, in recession well before the announcement. For policy to have mitigating effects,
it must occur quickly. Policymakers may not have the luxury of holding themselves to
as strict a definition of recession as economic analysts.