Depressing recessions

A frequently cited definition of recession is two consecutive quarters of contracting GDP. There are many problems with such a definition. There are, for example, other variables that economists, policy makers, and investors should take into account, such as employment. Also, quarterly data might not be timely enough to detect short downturns in activity.

In the U.S., the official arbiter of recessions is the National Bureau of Economic Research (NBER). The NBER, which defines a recession as a “significant decline in economic activity spread across the economy, lasting for more than a few months,” looks at a number of economic variables, including employment, industrial output, real income, and wholesale and retail sales. It dates the start of a recession at the peak of business activity, and the end of the recession and beginning of an expansion when business activity bottoms. This helps explain why the NBER’s recession dating has such large lags.

One of the most remarkable developments few people seem to appreciate is the U.S. business cycle has become flatter and longer than in the past. This phenomenon may have numerous contributing factors, such as better inventory management, capital-market flexibility, and the increasing importance of the service sector.

The U.S. economy has experienced only five quarters of negative growth in the past 17 years and seven quarters of negative growth in the past quarter century.