By S. Wade Hansen, analyst at LearningMarkets.com
Who Decides When We're in a Recession?
Recession is a scary word. Nobody likes to talk about recessions during good economic times because they don't want to jinx a good thing, and nobody wants to be the first one to say we are in a recession when times look tough because they may be wrong. Ultimately, someone does have to come out and say we are in a recession, but who is that someone? Who has the ultimate responsibility of determining when a recession actually begins and when it ends?
The answer: As you will learn in the video that accompanies this article, the National Bureau of Economic Research (NBER) has the responsibility of determining when a recession begins and when it ends. More specifically, it is the Business Cycle Dating Committee within the NBER that decides.
On Friday, November 28, 2008, the committee at the NBER announced that the United States entered its most recent recession in December 2007.
What is a Recession?
Many people define a recession using an old rule of thumb that says a recession occurs any time you have two consecutive quarters of negative Gross Domestic Product (GDP) growth. However, this isn't entirely accurate. According to the NBER:
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.
How Does the NBER Determine We're in a Recession?
The NBER looks at multiple factors when determining whether or not we are in a recession. But because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.
- Domestic Production: The committee believes that the two most reliable comprehensive estimates of aggregate domestic production are normally the quarterly estimate of real Gross Domestic Product and the quarterly estimate of real Gross Domestic Income, both produced by the Bureau of Economic Analysis.
- Employment: The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment.
I've scratched the surface of this topic in the article above, but I go into more detail about identifying the peaks and troughs that encapsulate a recession and what it really means to be in a recession in the Defining a Recession Video. Click here to watch.
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