What's a Recession?
The National Bureau of Economic Research (NBER)’s Business Cycle Dating Committee is the official decision maker regarding whether or not the U.S. economy is in a recession. The committee consists of eight preeminent economists. To use an analogy, they are essentially like an umpire in a baseball game – calling the balls and strikes – when they determine if the U.S. economy is in a recession or is not in a recession. The 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.” Source: https://www.nber.org/news/business-cycle-dating-committee-announcement-january-7-2008
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Please notice the words in that definition such as “significant decline". One person’s definition of a “significant decline” may differ from another person’s definition of “significant decline”. For example, there may be a decline in the economy, but it may be considered de minimis and hence, not significant, by one person whereas another person may consider it be substantial and hence, significant. The NBER’s recession definition is subject to interpretation from one person to the next and not based on a precise mathematical calculation such as at least two consecutive quarters of negative real GDP growth.
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U.S. recessions are fairly rare events lately; however, when they do occur, they can be devastating. In the U.S., there have been only five recessions in about the last 45 years.
​Here are the last 5 NBER Business Cycle Peaks/Troughs:
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​​You may wonder why individuals and institutions can’t just wait for the NBER to announce a recession start or end date instead of relying on other economists or services to try to determine if the U.S. economy is in a recession or not. Well…some individuals and institutions may choose to wait, but those who decide to wait for NBER’s signals may be at a competitive disadvantage since the NBER typically doesn’t quickly publicly announce the starting points and ending points of recessions. For example, the December 2007 business cycle peak (start of the recession) wasn’t publicly announced by the NBER until December 1, 2008 – about a year after the economic turning point. The November 2001 business cycle trough (end of the recession) wasn’t publicly announced by the NBER until July 13, 2003 – over 18 months after the economic turning point. The February 2020 peak (COVID recession) was announced much quicker on June 8, 2020, but that was an atypical recession in the sense that one likely didn’t need much economics training to figure out that if numerous businesses were ordered to close that that would have a material negative impact on the economy. Dr. Halstead doesn’t see anything sinister with NBER’s delayed business cycle peak/trough announcements; Dr. Halstead thinks they simply want to ensure that the turning points are as accurate as possible and don’t want to have to go back and forth with numerous revisions. Hence, in that aspect, they play the role of economic historians.
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You may be perplexed by the infrequent number of U.S. recessions, yet the typically frequent discussion by some in the media of a possible upcoming recession. It may be due to fear mongering. The media are driven by ratings and negative, doom-and-gloom stories typically attract more viewers/listeners/readers than positive stories. Which news story are more individuals likely to tune into?
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“Economist expects devastating recession soon.”
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“Economist sees positive economic growth continuing.”
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It’s likely the former rather than the latter will attract more viewers/listeners/readers. The doom-and-gloom economic stories may start with something not particularly alarming (although it could be the start of something) like just a few 1% or more down days in the overall stock market over a short period of time. One must be aware of the “broken clock economists”. The broken clock economists (like a broken clock is always right twice a day) essentially have given up on trying to be timely in their recession calls. Instead, they appear to have a business model whereby they are always negative on the U.S. economy. With such a process, they can always say they predicted the next recession, even if they happen to be, say, decades early. Plus, they know that some in the media salivate over negative news stories; hence, these broken clock economists are likely to get a lot of air time to spread their doom-and-gloom stories.
