US Recession: Macroeconomic vs. NBER Definitions Explained

Introduction and Overview of Recessionary Trends

According to the latest data available at the time of this writing, the US was in the grip of a recessionary trend expected to continue for at least four quarters — a more severe outcome than the mild recession that the majority of forecasters were predicting. Several indicators pointed clearly in this direction: a decline in employment rates in January, extremely high levels of initial and continued unemployment claims, a declining non-manufacturing ISM index, a negative Philly Fed report, and a host of other forward-looking indicators signaling recession.

There had also been a fall in real retail sales during the holiday season, results far below average, and declining sales for the majority of retailers in January, accompanied by plummeting auto sales. Consumer confidence was very weak and increasingly declining. A credit crunch was intensifying in credit markets, as measured by a variety of credit spreads. The onset of a severe recession in commercial real estate and recessionary trends in the housing sector were evident, with home prices dropping sharply. A serious credit crisis within the banking system was confirmed by the Federal Reserve's survey of loan officers. Additionally, there had been a correction across stock markets and the beginning of a bear market in the NASDAQ (Roubini, 2008).

Macroeconomic vs. NBER Definitions of Recession

According to the macroeconomic concept, a recession is considered as a drop in the national Gross Domestic Product (GDP) during two consecutive quarters. A prolonged recession is sometimes called an economic depression. In other words, a depression is a condition wherein the economy has fallen and is unable to recover. A short period of severe decline is sometimes referred to simply as an economic recession.

In the opinion of prominent theorist John Kenneth Galbraith, there is no practical distinction between these classifications, save the desire to discount the threat of panic. The policies implied by the prevailing definition — including assumptions about the significance of GDP to the welfare of people, or the desirability of quarterly reporting — are challenged in some theories of a broader political economy that incorporates voting, market behavior, and other activities.

Economic shocks are most often the cause of recessions. The largest global recession in modern history was the onset of the Great Depression during the late 1920s and 1930s. Other significant recessions include the two oil crises of the 1970s and the Long Depression of the 19th century. The sharpest recession on record is generally considered to be the one that followed World War I, when much of Europe was gripped by hyperinflation — though this recession lasted only a brief period ("Recession — macroeconomics," n.d.).

The National Bureau of Economic Research (NBER) defines recession in somewhat broader terms compared to the macroeconomic concept. According to the NBER's definition, a recession is a condition marked by a major decline in economic activity lasting for more than a few months. Some economists argue that the economy is in recession when the natural growth rate in GDP falls below an average of 2% ("What is recession?" n.d.).

Business Cycle Theory and Its Application

The NBER's Business Cycle Dating Committee maintains a history of US business cycles, identifying the dates of peaks and troughs that define periods of economic recession or expansion. The period from a peak to a trough constitutes a recession, while the period from a trough to a peak constitutes an expansion. According to this chronology, the most recent peak at the time occurred in March 2001, ending an unprecedented long expansion that had begun in 1991. The most recent downturn subsequently came to an end in November 2001.

The applicable aspects of business cycle theory define recession as "a marked slowdown in economic activity spread across the economy, lasting for more than a few months, usually visible in real income, GDP, employment, industrial production, and wholesale-retail sales. A recession begins immediately after the economy reaches a peak of activity and ends when the economy reaches a trough. Between the trough and the next peak, the economy is in an expansion phase. Expansion is the normal state of the economy. Almost all recessions last for a brief period, and their frequency has declined in recent decades" ("NBER's Recession Dating Procedure," 2003).

Business cycles occur exclusively in communities with a modern form of economic organization — a point identified by many economic writers and implied by all who trace these cycles to institutional causes of recent development. Theories that seek alternatives to physical causes need not be viewed as dissenting opinions. Whatever cycles occur in the weather generate cycles in economic activity where that activity is organized on a business basis. The dependence of business cycles on a specific institutional framework is a fact of the highest theoretical importance — but the lesson depends on an understanding of the institutional scheme in question (Mitchell, 1954).

The phases of business cycles to which the terms "crisis" and "recession" are applied are generally characterized by an overall drop in prices, a shift in comparative values, and a downward readjustment of a large volume of creditor claims. The severity of these deflationary processes varies from one cycle to the next, shaped by all the forces at work in the cyclical fluctuations of business. Their nature and outcomes also change alongside changes in economic organization. However, given a heavy burden of fixed expenses, a broader debt structure, and a monetary economy that penetrates more deeply into everyday life, an overall deflation and the readjustments it entails might be expected to place greater strain on the economic system. This is not to assert that causal forces necessarily change over time — rather, that different reactions to those forces can be anticipated as the organizational and operational features of the overall system evolve. For this reason, a survey of the recent recession carries special interest (Mills, 1936).

Conclusion

To sum up, the US economy found itself in a recessionary phase marked by an all-round drop in key economic indicators such as GDP, real income, employment, and housing values. The macroeconomic and NBER definitions of recession differ to some extent. While a falling GDP during two successive quarters constitutes a recession under the macroeconomic framework, the NBER's view centers on a major slump in economic activity persisting for more than a few months.

The applicable aspects of business cycle theory describe recession as a discernible slowdown in economic activity spread across the economy, lasting more than a few months, and normally visible in employment, real income, industrial production, GDP, and wholesale-retail sales. The US recession following March 2001 and the 9/11 attacks appeared to confirm this characterization through an abrupt decline in economic activity. Consumers' perceptions of their own financial situations were somewhat more positive relative to their ratings of the national economy overall — yet even those self-assessments had reached their most pessimistic levels in a decade. The fact that 83% of Americans stated the economy was deteriorating, and 46% rated it as poor, underscores the breadth and depth of the recessionary conditions that prevailed.

References

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Mills, Frederick C. (1936). Prices in recession and recovery: A survey of recent changes. National Bureau of Economic Research.

Mitchell, Wesley C. (1954). Business cycles: The problem and its setting. National Bureau of Economic Research.

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N.A. (n.d.). "What is recession?" Retrieved June 4, 2008, from http://recession.org/definition

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Roubini, Nouriel. (2008, February). "The current US recession and the risks of a systematic financial crisis." Written testimony for the House of Representatives' Financial Services Committee. Retrieved June 4, 2008, from