Friday, September 30, 2011
What is a recession and are we in one?
The National Bureau of Economic Research (NBER) is the group that determines when recessions begin and end. But isn't a recession 2 or more consecutive quarters of declines in real GDP? If so, why would we need a group to determine whether there's a recession? Both the recession of 1980 and 2001 did not fit the commonly cited rule of thumb (i.e., real GDP did not decline for 2 consecutive quarter). What does the NBER consider? The three primary variables are real GDP, economy-wide employment, and real personal income (though they consider other variables as well). According to a report released this morning (see table 5), real personal income less transfer payments (the measure used by the NBER) declined for the second consecutive month (down 0.1% in July and down 0.2% in August). Payroll employment was flat in August while aggregate hours worked declined. We won't get the first estimate for economic growth in the third quarter until the end of October, but most economists expect it to be small but positive, continuing the pattern of weak growth from the first half of 2011 during which the US economy grew at a 0.8% rate. Add it up and it's a close call. Since the declines in real income have only been for 2 months, payroll employment hasn't declined yet, and real GDP is still inching forward, it's still too soon to declare a recession. Economists may debate whether we're on the verge of a recession, but for the average person, it still feels like one.