What is a Recession?

Recession definitions (and fears) are running amuck.

1. decline in economic activity: a period, shorter than a depression, during which there is a decline in economic trade and prosperity

“Definition: A recession is defined to be a period of two quarters of negative GDP growth.
Thus: a recession is a national or world event, by definition. And statistical aberrations or one-time events can almost never create a recession; e.g. if there were to be movement of economic activity (measured or real) around Jan 1, 2000, it could create the appearance of only one quarter of negative growth. For a recession to occur the real economy must decline.”

New York Times
“A recession is typically defined as an extended period in which the economy shrinks, leading to a rise in unemployment and a drop in consumer spending and business investment.”

Is there a recession in our immediate future?

We probably won’t know for sure until the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) issues a statement. NBER is considered the official agency for the measurement of business cycles in the U.S. and they make the determination on when a contraction (recession) officially begins and ends. “Contractions (recessions) start at the peak of a business cycle and end at the trough.” The NBER definition for recession (contraction) is:
“a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy.”

NBER further states:
“The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Although the press often defines a recession as two consecutive quarters of decline in GDP, the two consecutive quarters of decline in real GDP is not used by NBER due to the fact that not all recessions identified by them have consisted of two quarters – most have, but not all.

Just like you have good days and bad days, our economy has good days and bad days as part of the normal business cycle. Unfortunately, the 249 point drop the DJIA took on September 7, 2007 is a rather dramatic showing, but the financial markets are unusually skittish right now over the effects of the subprime mortgage failures and tighter credit policies, so we’re probably going to have many market ups and downs over the next year.

The employment report released indicating a loss of 4,000 jobs in August and downward revisions for both June and July sent the DJIA spiraling, but as bad as the employment numbers are, they still only represent a period of three months, or one quarter.

Following are statements made by the NBER on the most recent peaks and troughs in our economy and can be viewed in their entireity on the NBER website.
The November 2001 trough was announced July 17, 2003.
The March 2001 peak was announced November 26, 2001.
The March 1991 trough was announced December 22, 1992.
The July 1990 peak was announced April 25, 1991.
The November 1982 trough was announced July 8, 1983.
The July 1981 peak was announced January 6, 1982.
The July 1980 trough was announced July 8, 1981.
The January 1980 peak was announced June 3, 1980.

Steve Forbes urged the Federal Reserve to lower their fed funds rate from 5.25 to 4.25, while Philadelphia Federal Reserve Bank president Charles Plosser stated a cut may not be necessary. There certainly wasn’t any shortage of opinions on whether or not the rate should be decreased at the FOMC meeting held on September 18, 2007.

Chairman of the Federal Reserve System, Ben Bernanke, is a former member of the Business Cycle Dating Committee of NBER so chances are, the decision made by the FOMC is the right choice for our teetering economy.

The 1/2 percent federal funds rate decrease from 5.25 to 4.75 made by the fed is the first decrease in the fed funds rate since June 25, 2003 when the rate was cut 1/4 point from 1.25 to 1.00 and sent the DJIA soaring 336 points after the announcement was made.

Will the federal funds rate decrease coupled with the discount rate decrease keep this country from falling into the murky waters of a recessionary downturn? Only time will tell, but we can rest assured we’re in good hands with Ben Bernanke at the helm of our economic ship.