What’s a Recession? (officially)

Here’s the definition of recession directly from the referees that make the official call, the National Bureau of Econ Research Bus. Cycle Dating Committee.  Guess what, it’s NOT “2 quarters of declining GDP” as numerous news media types and financial talking heads like to say (it hasn’t been that since 1978, but they never let the facts get in the way of their commentary).

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then.

The committee believes that the two most reliable comprehensive estimates of aggregate domestic production are normally the quarterly estimate of real Gross Domestic Product and the quarterly estimate of real Gross Domestic Income, both produced by the Bureau of Economic Analysis.  In concept, the two should be the same, because sales of products generate income for producers and workers equal to the value of the sales.  However, because the measurement on the product and income sides proceeds somewhat independently, the two actual measures differ by a statistical discrepancy. The product-side estimates fell slightly in 2007Q4, rose slightly in 2008Q1, rose again in 2008Q2, and fell slightly in 2008Q3. The income-side estimates reached their peak in 2007Q3, fell slightly in 2007Q4 and 2008Q1, rose slightly in 2008Q2 to a level below its peak in 2007Q3, and fell again in 2008Q3. Thus, the currently available estimates of quarterly aggregate real domestic production do not speak clearly about the date of a peak in activity.

Other series considered by the committee, including real personal income less transfer payments, real manufacturing and wholesale-retail trade sales, industrial production, and employment estimates based on the household survey all reached peaks between November 2007 and June 2008.

Note that as of now, March 2, 2010, we have conflicting signals about the “end of the recession”.  GDP turned positive in 3Q 2009,  but employment continues to show job losses.  It ain’t over till it’s over, no matter how much Wall St and Washington like to say we’re in recovery.