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).

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.

Macroeconomic vs. NBER Definitions of Recession

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.).

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).

Business Cycle Theory and Its Application

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).

The US was in a phase of recession by NBER's definition. Because a recession affects the overall economy of a nation rather than remaining confined to a single sector, the NBER's Committee emphasizes economy-wide measures of economic activity. The Committee views real GDP as the single best measure of total economic activity. It also emphasizes two monthly estimates of economy-wide activity: (i) personal income minus transfer payments in real terms, and (ii) employment. In addition, the Committee highlights two indicators that focus primarily on manufacturing and goods: (i) industrial production, and (ii) the volume of sales in the manufacturing and wholesale-retail sectors, adjusted for price changes ("NBER's Recession Dating Procedure," 2003).

Figures released by the Bureau of Economic Analysis for GDP revealed three quarters of negative growth — in the first, second, and third quarters of 2001 — though earlier data had shown only the third quarter as negative. To confirm its dating, the Committee noted: "The Committee does not rely on a simple rule of thumb such as two consecutive quarters of negative growth, nor does it depend as such on GDP data in reaching its conclusions. Instead, it examines an extensive range of statistics. During November 2001, the Committee identified the date of the peak in activity as March 2001, using its normal indicators. The two-quarter rule of thumb would have allowed declaration of a recession only in August 2002, bypassing the declaration that the recession had begun in early 2001 — as stated in the Committee's November 2001 announcement. It was not until eight months later that revisions to GDP data revealed declining real GDP for the first, second, and third quarters of 2001" ("NBER's Recession Dating Procedure," 2003).

The US recession following March 2001 and the September 11 attacks is considered to have confirmed the case for recession, marked by a sudden decline in economic activity. According to indexed data for non-agricultural payroll employment — with March 2001, the official cyclical peak, set equal to 100 — job losses were modest through the third quarter but took a decidedly negative turn after the 9/11 attacks. The sharp decline in employment during the fourth quarter, particularly in October and November, confirmed that the US economy was in a recessionary phase. In total, the US shed 424,000 jobs in the second and third quarters combined, and 933,000 jobs in the fourth quarter alone. During the second quarter of 2001, weakness in the US economy was concentrated primarily in business fixed investment, particularly in information technology products and services. Consequently, job losses centered mainly in manufacturing — especially high-tech goods — and in business services, including IT-related services (Daly, 2002).

At the time of this writing, the dollar was at an unprecedented low against the Euro, oil prices were above $100 per barrel, consumer prices had risen 4% from the prior year, and Federal Reserve Chairman Ben Bernanke was repeatedly cutting interest rates. The subprime mortgage crisis continued to inflict damage, and government coffers appeared insufficient to fund the full scope of the rescue underway. Overall, a recession is defined as a phase marked by a decline in a nation's GDP for two or more consecutive quarters ("The Coming Recession," 2008).

According to consumer surveys, 49% of respondents believed their financial situations were getting worse, while only 32% believed they were improving. This represented the worst consumer assessment of personal financial trends recorded in that decade. US consumers tend to be optimistic about their own financial futures, especially compared to their attitudes about the national economy. For instance, following the 9/11 terrorist attacks in October and November 2001, the percentage of consumers stating that their financial conditions were improving ranged between 45% and 50%. The previous low for such optimism in that decade was recorded in October 2002, and 43% held this perception in March 2003 when the Iraq War was beginning. Against this backdrop, the finding that only 32% of consumers said their finances were improving while 49% said they were getting worse represented not merely a complete reversal from a year earlier, but the worst reading on this measure in that decade (Jacobe, 2008).

Conclusion

N.A. (2003, October). "NBER's recession dating procedure." Retrieved June 4, 2008, from http://www.nber.org/cycles/recessions.html

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