What IS a Recession???

The white house recently issued a press release defining what it believes to be a recession – “a monthly concept that takes account of a number of monthly indicators — such as employment, personal income, and industrial production — as well as quarterly GDP growth”.  This definition is the broader definition issued by the National Bureau of Economic Research or the NBER. This is in contrast with what most market economists consider a recession – 2 consecutive negative growth GDP quarters.

In reality, both are correct. Technically, NBER considers this a ‘contraction’ though it’s often referred to as a recession. Here, we’ll consider the NBER’s definition a contraction and GDP’s definition a recession for clarity. The NBER also measures a contraction from the peak to the end, so it’s contractions are measure slightly different.

It is not unusual for GDP to define us as in a recession while the NBER does not consider the economy in a contraction Since 1969 this has happened in 7 quarters. The opposite has also happened, The NBER stated we were in a contracting quarter but GDP did not state we were in a recession. This has occurred in 6 quarters.

This is mainly due to the indicators used in the NBER’s contraction definition. Many are considered lagging indicators, or indicators that are not known, calculated or occur until after the economy has contracted.

However, what we do see is that each time one or the other occurred, the other eventually also occurred. The NBER issued a contraction 2 times before GDP was in a technical recession, but both times GDP followed suit and resulted in a recession. By GDP standards we were in a recession 4 times before the NBER issued a contraction. The remaining 2 contractions and recession aligned perfectly.