Notes from the Economy: It's Not a Recession...Yet

The Bureau of Economic Analysis (BEA) has released GDP figures for the third quarter. This "advance" number indicates that the economy contracted in the past three months at annual rate of 0.3 percent. This number, however, may change when the BEA releases the "preliminary" figure -- an estimate based on more comprehensive data -- on Nov. 25. If you've heard or read news media reports of this number, they've probably also informed you that a recession is defined as "two consecutive quarters of economic contraction (or negative GDP growth)". This is an oversimplification. The private, nonprofit National Bureau of Economic Research (NBER), which is authoritative in declaring recessions, defines a recession as: ...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. In an FAQ on their recession dating procedure, NBER elaborates on the "two-quarter" rule: Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure? A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. The most recent recession in our chronology was in 2001. According to data as of July 2008, the 2001 recession involved declines in the first and third quarters of 2001 but not in two consecutive quarters. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology. Image by Flickr user su-lin used under a Creative Commons license.
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