With all the talk about a possible recession (and there really is nothing definitive saying the U.S. economy is in one, or all that close to one), I thought I would discuss what the definition of a recession actually is.

A recession is considered to be two or more consecutive quarters of negative economic growth or two or more consecutive quarters of decline in gross domestic product (GDP), although in the U.S., the official designation is done by the National Bureau of Economic Research which has a somewhat more vague definition. A depression is essentially a more severe version of a recession.

In order to fit into the definition of a recession, there must be two quarters in a row of negative growth. Currently, there isn’t data supporting one quarter of negative economic growth, but the data also tends to lag by at least a quarter. The most recent release on GDP by the Bureau of Economic Analysis for the third quarter of 2007 indicates that GDP increased by 4.9 percent. The fourth quarter data isn’t yet available.

The data that has been available has shown that economic growth in the US has been slow for several years now–slow, but positive. That growth rate is typically affected by interest rates; in general the higher interest rates are, the lower growth is, and the lower interest rates are, the higher growth is; however, with higher growth comes higher inflation, and since the days of Alan Greenspan the Federal Reserve has been obsessed with stamping out inflation, which has kept inflation low but growth slow. As growth has continued to slow in recent times, the Fed has lowered interest rates, and today, fearing the worst, it cut interest rates by the largest amount (three quarters of one percent) in nearly a quarter century. It takes time for these cuts to work their way through the economic system, so we may not see the effects of the cuts for quite some time. Will it be enough to prevent a recession? It remains to be seen, but typically, lower interest rates increase growth–eventually.

To say a recession is coming is like saying it’s going to rain; if you wait long enough, sooner or later, you’ll be correct. The question is when a recession will occur. Could it be happening now? It’s possible, given the lag time in economic data, but to prove it you’ll have to bring the data.

7 Responses to “Working Backwards: What’s a Recession?”

  1. Ron@TheWisdomJournalon 23 Jan 2008 at 5:36 pm

    Thank you for posting this. I get so weary of people predicting the doom and gloom. No one knows what a recession is, just that everyone is talking about it. By the media constantly harping on it, they get everyone on edge, thinking it’s inevitable.

    Good post. Putting it in such clear and understandable terms is valuable to everyone.

    Ron@TheWisdomJournal

  2. adminon 24 Jan 2008 at 12:04 am

    Ron,

    You’re welcome. I hope that it helps some folks to learn what a recession actually is…
    -
    Ryan

  3. puaimanaoon 24 Jan 2008 at 1:18 am

    drats; I wanted to reply to this post, but somehow ended up clicking on another post and writing my response there (rubgrumgrumblemmumble) Admin, if you can move it, I would be grateful.

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