When is the USA in a Recession?

When is the USA in a recession?  Given the economy has slowly been recovering since the nadir of the Great Recession (2007-2009) this post might seem out of place.  Nevertheless, a government announcement last week makes the question timely.

There are two different methods of tracking when a country is in a recession.  The “common” method, used by most media outlets states a country is in a recession when there are two consecutive quarters of negative GDP.  The common method states that when a country produces fewer goods and services for six months or more a country is in a recession.  The actual method used in the USA is to let the National Bureau of Economic Research (NBER) decide.    The NBER is the “expert” rule.  A small group (currently 8 people)  of experts look at a wide variety of information and when the wise men/women feel the country is in a recession, we are.

Which is the best method of deciding?  Letting a small group of experts decide is problematic because there is too much flexibility and discretion.  Decisions based only on expert opinion are typically not widely shared.  It is difficult to get consensus on how to fix a problem when only a few experts can define when a problem has started and when it has ended.

The simple “common” rule also has problems.  First, there is no flexibility.  It misses the context of changes in economic growth.  For example, the US federal government comprises about 7% of GDP.  If Congress shuts down the government for an extensive period of time it could potentially reduce GDP for two consecutive quarters.  However, many people would not consider this an economic problem.

The second and more important problem is that the US government constantly changes its estimates of GDP.  It is impossible to have a simple rule when the data underlying the rule are often revised.  Last week the extent of the revisions was quite stark.  The US government published a news release stating that real gross domestic product decreased 1.0% at an annual rate in the first quarter of 2014.   The original estimate was growth of 0.1%.

In simple terms in one month the government said GDP was increasing and four weeks later stated it was decreasing by a large amount.  The US is a very complex economy and the government’s goal is to provide information as fast as possible.  One by-product of releasing numbers early is that they are subject to revisions when better data are available.  Nevertheless, given the government revises all GDP figures back to 1929 roughly every five years it is exceptionally hard to use the common rule of two consecutive quarters of falling GDP.  The common rule does not work because at any time a negative GDP figure could become positive or a positive figure negative!

The two methods give very different views of the Great Recession.  According to the current version of GDP data, shown in the picture below, the Great Recession lasted just 1 year.  It started in the 3rd quarter (June) of 2008 and ended in the 2nd quarter of 2009 (end of May) .  The expert view was that the Great Recession was 18 months long.  It started in December 2007 and lasted until June 2009, which is 50% more time than tracked by the common rule.   The typical person in the street likely thought the recession lasted even longer.

USA_GDP_DuringGreatRecessionThe two methods don’t agree on when the recession happened.  Which method, the common rule or expert decision, do you think is best, or is there a better method of deciding when the country is in economic trouble?

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