What is Recession?
In the 1920s, the U.S. National Bureau of Economic Research (NBER) called periods of decline depressions. But as recessions became less severe, the agency coined the term “recession” (from the Latin recessus for “retreat”).
The NBER believes that it is impossible to accurately distinguish between a short-term recession and a recession. It is not possible to clearly define periods of recession, but it is possible to define the highs and lows of economic development. A recession comes after the economy accelerates to a peak and ends when the economy trough to a low. In a self-regulating market economy, unlike a centrally planned economy, a cyclical trajectory of development is inevitable. Each economic cycle consists of the following phases:
- From Recovery to Expansion. The main characteristics of the recovery to expansion phase in the business cycle, as defined by the National Bureau of Economic Research (NBER), include increasing economic activity, rising employment levels, and improving consumer and business confidence. During this phase, businesses begin to expand their operations, investments in fixed assets are increasing, new enterprises are founded, production increases and consumer spending rises. All this leads to an explosive growth of GDP and an increase in workers’ incomes. Interest rates may start to increase, and inflation may begin to rise. The highest point is called the Peak or Boom. At the Peak the economy is at its highest level of development, which allows the active introduction of new technologies, consumer demand increases, and unemployment decreases. Inflation is approaching peaks and regulators are forced to tighten monetary policy by raising rates. As a result, credits become more expensive and the flow of funds to the real sector and services decreases. Processes begin to slow down, sales are reduced, and inventories in warehouses grow.
- From Recession to Depression. The main characteristics of a recession, as defined by the National Bureau of Economic Research (NBER), include a significant decline in economic activity, usually measured by a decrease in the gross domestic product (GDP), employment levels, and production. Corporate profits decline, and the lack of available credit can not stabilize the positive dynamics of economic activity, it slides to zero or negative values. Interest rates may be lowered in an attempt to stimulate economic activity, and inflation may decrease, but monetary policy remains tight, inflation is falling, but unemployment is rising. A recession is typically marked by a contraction in consumer spending, reduced business investment, and decreased consumer and business confidence. Overstocking.
Recessions can be a result of a variety of factors, including changes in economic policy, financial crises, or external shocks such as natural disasters or pandemics. The lowest point is called Trough. It is the end of a period of economic contraction and the beginning of an expansionary phase. During the trough, economic activity reaches its lowest point, and the economy begins to recover. The trough is marked by high levels of unemployment, low levels of production, and decreased consumer and business confidence. However, as the economy begins to recover, employment levels may start to increase, production may start to rise, and consumer and business confidence may improve.
Monetary policy is switched to stimulus mode, Interest rates may be lowered and inflation may be low, but sales remain low. Inventories are reduced. It is the latter that indicates the need to intensify production, which leads to the beginning of a new cycle.
The bureau made its first publication on the changing business cycle in 1929. Some modern business cycle theories distinguish subphases from the main phases or consider the highest and lowerest points to be separate phases of the cycle as well. But, the allocation of such phases is conditional, because there are no clear criteria for their definition.
Currently, the National Bureau of Economic Research (NBER) is the organization that officially determines the start and end dates of recessions in the United States. NBER 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“. In all, the NBER assesses recession on 24 indicators, but there are no fixed quantitative criteria for each; the decision to declare a recession is made on a case-by-case basis based on aggregate data. Read more in the article “What is Recession?“
In 1974, economist Julius Shiskin in the New York Times provided a detailed list of quantitative criteria for defining a recession, one of which was a decrease in GDP of at least 1.5% for two consecutive quarters. This empirical definition of a recession is quite often used by economists as the most comprehensible and easiest to understand in terms of data availability. However, this characteristic does not always justify itself due to the fact that post-quarter GDP figures are recalculated over time. The Julius Shiskin methodology for calculating recession has not been officially recognized. Read more in the article “What’s A Recession, Anyway?”
It is impossible to make generalizations based on the fact that it has always been so, use a generalization in case you know a result of which it has become so.
On July 28, the US Bureau of Economic Analysis (BEA) published GDP data for the 2nd quarter of 2022. Real GDP decreased by -0.9% compared to the 1st quarter, for which the decline in GDP was also negative and amounted to -1.6%.
Thus, it became possible to announce a new “mild recession” in the US, since GDP growth was negative for 2 consecutive quarters. At the same time, the “2 quarters” rule is not official, but rather simplified, which, however, worked 99% earlier. At least, the National Bureau of Economic Research (NBER), which officially announces the start and end times of recessions in the United States, has repeatedly stressed that it does not use this rule, but takes into account a greater number of economic parameters (in particular, employment growth). In a standard situation (for the entire history of observations), the onset of a recession has always been accompanied by an increase in unemployment (Fig.1).
However, the current situation in the US economy is very different from the standard one. If the NBER announces the beginning of a new recession in January 2022, then a situation will arise when the recession was accompanied by a decrease in the unemployment rate from 4 to 3.6% during the first 2 quarters of the year. In other words, there would be a recession in the US in fact “at full employment.”
In addition, only the GDP growth rate is not an unambiguous proof of the onset of a recession in the case of a “mild recession”, at least for 2 reasons. Firstly, the primary information on the value of GDP will be subject to several revisions over the next 2 years, which may change the sign of GDP growth from “-“ to “+” (as has already happened with the dating of the 2001 recession). Secondly, a planned change in the base year when calculating real GDP may also change the sign of GDP growth from “-“ to “+” For example, in 1996 prices, when the decision was made to start the recession in 2001, there was a 2 quarter increase in real GDP (2nd and 3rd). Then, almost 2 years later, when the last revision of the GDP data was completed, it turned out that the recession began almost six months earlier than it was officially announced. This fact even caused conversations among NBER members about a possible revision of the original dating of the beginning of the 2001 recession (which has never been done before). However, later, when changing the base year from 1996 to 2002, it turned out that there was no need for such a revision. But at the same time, another problem arose — the rule of “2 quarters” ceased to be fulfilled, i.e. GDP growth became negative in the 1st quarter, positive in the 2nd, negative again in the 3rd quarter of 2001 and positive in the following quarters of several years. In other words, when dating the 2001 recession in 2002 prices, the “2 quarters” rule would be violated.
Thus, in the case of a “mild recession,” it is extremely difficult to date the time of the beginning (end) of the recession, which confirms the significant hour lag between the actual beginning of the recession and the time of the announcement of its beginning NBER (22 months in the case of the 2001 recession).
Is it possible to consider the negative GDP growth for 2 consecutive quarters at the beginning of 2022 as a new recession in the United States? If it’s not a recession, then what is it? If this is a new recession, what explains its non-standard nature, when will it end and when can we expect the next recession? Is the financial crisis of the beginning of 2022 natural and when can the next crisis be expected?
In our next issue, within the framework of the CMI model of business cycles developed by us, we will answer these and other questions about the near future of the US economy.