Definition of Recession

The standard text book definition of a recession is:
"Negative Economic Growth for two consecutive quarters". This means there must be a fall in real output for a period of 6 months.
However, not all economists are happy with this definition. Why?
  1. Population Growth: If the population was increasing by 1% a year. Real GDP growth of 0.5% would mean Real GDP per Capita was falling. This is an important factor for countries like the US which have growing populations.
  2. Statistics can be inaccurate. Often GDP statistics are inaccurate and need to be revised down. Therefore, growth of 0.3% could actually mean growth is falling 0.2%. However, figures can be rounded up as well as down.
  3. Growth Below Trend Rate. If capacity grows by an average of 2% a year, then economic growth of 0.8% a year, would mean a rise in spare capacity and therefore, unemployment is likely to rise. Therefore, some economists feel we should call a recession, if spare capacity is rising. However, the problem with this is that it means economic growth of 1.0% could be classed as a recession, which creates confusion. Some economists refer to a 'growth recession'. Low growth compatible with features of recession.
  4. Unemployment. Arguably, a distinguishing feature of a recession is rising unemployment. If unemployment rises significantly, then this signifies the economy is in recession. It would seem churlish to say the economy was not in recession, if unemployment has risen by 0.5 million but, growth is just about positive. However, how much unemployment would have to increase by? Also, unemployment could be caused by supply side factors, rather than demand side factors.
  5. Survey. You could ask a survey of economists / people, whether they think the economy is in recession. But, this is very subjective. At the moment, 53% of economists think the US in in recession, but, 47% don't - how helpful is this? (see: Why is the US not in recession?)

US Definition of Recession.

In US, a recession is said to occurs, whenever the National Bureau of Economic Research NBER says so. There definition is:
..... 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.
NBER further tells us that:
"There is no fixed rule about what weights are assigned to the various indicators, or about what other measures contribute information to the process."
This clearly is injecting a lot of subjectivity into the definition. I appreciate the reasoning behind the statement, but, it creates uncertainty as to what will cause a recession.

How I Would define a Recession

I believe a real recession requires a fall in real GDP. If growth is very low 0.5%, we can talk about the economy being nearly in recession, or below trend growth. But, we should stick to the definition that a recession requires a fall in GDP for at least one quarter.

I would be sympathetic to defining a recession as a fall in Real GDP per Capita.

Definition of Depression.

'When you lose your job..'
A depression is seen as a very dramatic fall in real GDP. Perhaps when Output falls for more than a year and a half or by more than say 5%. In the Great Depression of 1929-33, output fell by 18%

External Links
Further Reading on Recessions
Perma Link | By: T Pettinger | Tuesday, September 16, 2008
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