What is a recession? Here’s the official definition

Although some people claim that a decline in GDP for two straight quarters constitutes a recession, that’s not the official US definition

The US Commerce Department reported on July 28 that the nation’s gross domestic product (GDP) fell at an annual rate of 0.9% in the second quarter, marking two consecutive quarters of decline.

GDP generally measures the monetary value of goods and services produced in a country over a period of time, e.g. B. a quarter or year are produced.

The recent declines have since raised fears of a looming recession many on social media claim that a recession is defined by two consecutive quarters of negative GDP growth. But the White House says that’s not accurate, writing, “That’s not the official definition, nor is it how economists assess the state of the business cycle.”

Several VERIFY readers have wondered what constitutes a recession and if there is an official definition.

THE QUESTION

Is there an official definition of a recession?

THE SOURCES

THE ANSWER

This is true.

Yes, there is an official definition of a recession – and it’s not two straight quarters of contracting GDP.

WHAT WE FOUND

A committee within the National Bureau of Economic Research (NBER), a nonprofit research organization not affiliated with the federal government, determines when the US economy has entered a recession.

A recession is defined by the NBER as “a significant decline in economic activity that is widespread across the economy and lasts longer than a few months.” The organization considers many factors in its determination, including GDP, real income, employment, industrial production, and consumer spending.

Although people often cite two consecutive quarters of contraction in GDP as the definition of a recession, and countries like the UK use the term, it’s not an “official term” in the US, according to the Bureau of Economic Analysis, an independent federal agency. Statistical Agency.

The NBER definition is a “better approach” to defining a recession than GDP declines alone, University of San Diego economics professor Alan Gin told VERIFY.

“There are some quirks about GDP that don’t necessarily make it a good measure of how the economy is doing,” he said. “For example, there are two major areas that could distort. One is in the area of ​​international trade and the other is in the area of ​​factory supplies.”

When it comes to international trade, the number of items imported into the US is a metric that could have both positive and negative effects on the American economy. For example, imports can cause GDP to fall as the US sends more money abroad. However, when the US imports a lot of goods from other countries, it can actually signal that the economy is growing and people have income to buy the imported products, Gin explained.

“In the first quarter of the year, the economy contracted by -1.6% in terms of GDP. But a large part of that was due to a big surge in imports,” he said. “And again, that’s more indicative of strength than weakness in the US economy.”

Companies that are divesting their inventory or selling existing inventory without buying more are also seen as negative for GDP, which Gin said contributed to a second-quarter decline. But whether that is a positive or negative signal for the strength of the US economy is currently unclear.

So has the US met the definition of a recession? NBER has not declared any and it often takes a very long time to do so. According to Gin, sometimes a recession is over when the organization declares that there has been one.

Gin says he doesn’t think the US is currently in a recession, although it could be in the future. But for now, consumer spending is rising and industrial production and job growth remain strong, which are positive signs for the economy, he said.

According to the Corporate Finance Institute, during a recession “demand for goods and services begins to fall rapidly and steadily.” Since producers do not immediately notice this drop in demand, there is an oversupply on the market. As a result, all positive economic indicators such as income, output and wages also begin to decline.

At the start of the COVID-19 pandemic in 2020, the US slipped into a brief recession, according to NBER.

“I think the pandemic was just a one-off thing that caused disruption to the economy,” Gin said. “But over the past four years, one area that has been disrupted is the labor market. A large number of people have taken early retirement, some people have died as a result of the disease or have been ill with COVID for a long time and have therefore dropped out of the labor market.”

Whether the US is currently heading towards defining another recession only time, not social media claims, will tell.

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Alley Einstein

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