Are We In A Recession?

Such is the measure of double-speak these days that an ordinary word like “recession” is now a matter of debate. Most Americans understand “recession” to mean an economic slowdown. It usually entails rising unemployment, increased consumer anxiety and investment uncertainty. When I was being schooled in economic history, it was interesting to observe the common nomenclature for economic slowdowns for much of American history. Two words that come to mind are “depression” and “panic.” Yet history has demonstrated that most “depressions” were short-lived, and there appeared to be periodic adjustments to the economy, or what is known as “the business cycle.” In other words, the economy breathes. It has its ebbs and flows. The dips were usually mild in a relative sense. Most everyone still worked. Businesses struggled, but survived. The word “recession” seemed a more realistic description of this pattern.

Economics is a behavioral science. It is a science because it is intensely mathematical and involves a phenomenal level of data. So a “recession” has its mathematical aspect. Thus emerged the rule-by-thumb definition of a recession as being two consecutive quarters (six months) of declining gross domestic product (GDP).¹ It is all in the math. It is what it is. For the layman, it is important to note that GDP measures production of goods and services, including that of government.

Yet economics is a study of behavior. And behavior is not directly measurable. It depends on opinions and perspectives. Thus we have the Consumer Confidence Index, a survey that is routinely taken of people to measure their perception of the economy. Economists also use other measurables as proxies for evaluating what people are experiencing such as unemployment levels, interest rates, and spending patterns.

Recession: What exactly is it?

I seem to recall a more complicated description of a recession back when I was kicking the tires to economics in the mid-70’s. Believe it or not, I still have three economics textbooks sitting on my bookshelf. One textbook defines a recession as “The period of a business cycle during which total production and total employment are decreasing.”² Notice that this particular definition adds employment into the mix. We currently have what appears to be a strong employment level. So are we in a recession?

As if that is not a bit confusing, consider another text book that repeats the two consecutive quarters of declining GDP, but amends it with one important caveat. “Technically, an economy is in recession only after it has been declared to be in a recession by a group of economists appointed by the [NBER].”³

The National Bureau of Economic Research (NBER) considers other elements of the economy such as industrial production, employment, real income, sales and consumer perceptions. That’s a lot of information. “It is fairly slow in announcing business cycle dates because it takes time to gather and analyze economic statistics. Typically, the NBER will announce that the economy is in recession well after the recession has begun.”⁴

If you have been following the news, it is clear that parts of the media coverage have focused only on the simple definition of what constitutes a recession which is two consecutive quarters of declining GDP. Yet one of my textbooks concludes: “The fact that 1) the NBER economists include many factors, when determining a recession and 2) they base their decision on preliminary data, makes it difficult to provide an unambiguous definition.”⁵

The NBER has been known to declare a recession even when there are no consecutive quarters of declining GDP. They did so in 2001 after the tech bust, and again in 2020 when lockdowns were put in place.

It gets even more interesting when defining what exactly is a depression. It is, by definition, a “severe recession” or “large recession.” Some economists will use a rule-by-thumb approach, such as double-digit unemployment over a full year. There is a joke amongst economists “When your neighbor is unemployed, it’s a recession; when you are unemployed, it’s a depression.”⁶

What Do Other Sources Say

It is said that economics is the dismal science and it is often reflected in Wikipedia with rather dry and technical pages on economics terminology. Yet the directors of Wikipedia had to suspend edits on the “Recession” page because of an outbreak of an “edit war” on the subject, where a highly partisan debate evolved over the term. So I steered away from the people’s encyclopedia and instead checked other sites. Encyclopedia Britannica would have been a good bet, but only if I put $9 into the slot for a one month subscription. So I went to Investopedia which had the following:

“A recession is a significant, widespread, and prolonged downturn in economic activity. Because recessions often last six months or more, one popular rule of thumb is that two consecutive quarters of decline in a country’s Gross Domestic Product (GDP) constitute a recession.”

You can also go straight to the source itself, the agency of the US government that collects economic data: the Bureau of Economic Analysis. The BEA had the following:

“While gross domestic product (GDP) is the broadest measure of economic activity, the often-cited identification of a recession with two consecutive quarters of negative GDP growth is not an official designation. The designation of a recession is the province of a committee of experts at the National Bureau of Economic Research (NBER), a private non-profit research organization that focuses on understanding the U.S. economy.” [Emphasis added].

Hmm. Sounds like the priestly caste of scientists from Isaac Asimov’s Foundation Trilogy.

What about a leading business publication like Forbes. Forbes is usually on the conservative side of the economic and political spectrum, but even that publication defers to the NBER. Technically, it is two straight quarters of declining GDP. But that only meets two aspects of defining a recession: declining production and duration. Two important elements, but not all inclusive.

So I finally turned to one of my investment advisors: Fidelity. An investment company with no political agenda in mind mirrors what others have stated. It is a subjective call in some cases. The sudden drop-off of the economy at the beginning of the COVID-19 outbreak was a recession although it lasted only two months. The amplitude of the drop and the massive impact on employment trumped the requirement that it last for six months.

White House Press Secretary Karine Jean-Pierre

The Substitutionary Economy

So it must be said that fixating on the two-quarter duration is only part of the picture. Fox News is mistaken by insisting on such. The Biden administration, in some respects, is more accurate about the definition, but have done an exceedingly poor job of conveying their point. One major reason for that is that a drop of GDP for six months is a serious thing whether you call it a recession or not. The consequences are quite significant for segments of the population. As noted above, it is a recession when it is your neighbor who loses their job, but a depression when it is you. Recessions have psychological impacts, which is reflected in the Consumer Confidence Index (which is down significantly). It is rather disingenuous to defer a declaration of an economic slowdown to an agency that does not determine if we are in a recession until well after the fact.

Each recession is unique. While there are some general patterns that can be observed, there is something peculiar in each recession which triggers a sudden decline in the economy. For 2001, it was the end of the tech boom. In the late 80’s it was the bust of the real estate and financing sectors. In 2008 it was about the entire economy, as close to a depression as we have come since 1930.

Recession and Inflation -- the Worst Combination. Money Down the Tank — Money Down the Tank

I lived through the type of recession we are seeing today back in the late 70’s and early 80’s, where high inflation and rising unemployment combined to form several years of very hard times. The one thing I have observed in both is what I call the substitutionary economy, where consumers begin to make significant changes in the pattern of consumption. For us personally, it has been a radical reduction in eating out and the virtual elimination of high-end foods. Many of my friends have substituted a trip to Hawaii with a drive down the highway, others have substituted the drive down the highway with a stay-at-home vacation. This is happening within an economy that is presumably at full employment. Some Americans have nothing left to substitute and are facing the impossible choice of food, rent or transportation.

Self-Inflicted?

Economists no doubt will find this recession a fascinating study. It is, in some respects, self-inflicted, the perfect storm of profligate spending with a highly disruptive climate change agenda that has destabilized the energy sector and is about to wreak havoc in the agricultural sector. Energy and food are two of the three basic elements of life, the third being housing. The employment figures are deceptive because hanging over the market is a large segment of the population that has stopped participating in the economy. At some point, living off of welfare or off one’s parents will have to end.

The extent of this presumed recession will depend on whether the cause of the recession is recognized. As noted above, social policies have seriously disrupted food and energy sectors. The other is irresponsible deficit spending while an economy is running hot. Both of those elements are a sure-fire mixture for inflation. The remedy the Democrats are currently proposing may be worse, possibly contributing to the extension of the economic slowdown in much the same way the Carter administration magnified the recession under their watch.

Who Wins This Argument?

While economists have their biases, it is fair to say that most of them will distinguish between opinion and fact. Their perspective is often retrospective. Unfortunately, the news hounds want answers now, while the topic is hot. For the sake of the media and the general public, it is safe to say we may be entering a recession. Two straight quarters of declining GDP is a serious indicator. High inflation is another. The fact that the average American is undergoing serious economic hardship is a reality. Smells like a recession. Sounds like a recession. Looks like a recession. Must be a recession. We can all relax, because the NBER will tell us eventually. 🙂

The author of this article believes this recession has little to do with business cycles and much more to do with disruptions, whether it be the climate change agenda, pandemics, supply-chain disruptions, wars or the certainty of increasing interest rates. There is a lot going on and will make the years ahead quite interesting. All things being equal, we can only hope we have politicians in Washington who will balance the budget by reduced spending and re-energize the energy sector. Cutting welfare entitlements will put Americans back into the workforce. Those three things would reduce inflation and avoid the need for increased interest rates.