Recession: Are We or Aren’t We?
Living in an age when we expect access to virtually all goods and services 24/7 and real-time reporting on even minor news events, many people have little patience with economists who cannot say for sure whether we are currently in a recession or not. Given the financial headlines and carnage in the housing markets, how could there be any uncertainty?
No one is arguing, economically speaking, that these are “the best of times,” but weak economic growth is not the same thing as a recession. As defined by the Business Cycle Dating Committee of the National Bureau of Economic Research, “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.” This is an intentionally broad definition designed more for academic studies of business cycle dynamics than feeding the 24-hour news channels. The March 2001 peak of the last business cycle was not announced until November 26, 2001, while the November 2001 trough was not called until July 17, 2002. You can do pretty well without the Dating Committee with the rough rule of thumb that a recession is two consecutive quarters of negative GDP growth, but even this measure leaves us waiting at least two full quarters for an answer.
With any definition of recession, there is going to be a delay due to the time it takes the various statistical agencies to collect and publish the data. For example, estimates of GDP are made on a quarterly basis, and although we get preliminary estimates within one month after the end of a quarter, those figures face significant revision over the next two months, as additional data become available. It might be possible to reduce the time to get initial estimates and the magnitude of subsequent estimates, but timely, accurate data is costly—and real (inflation-adjusted) federal appropriations for economic statistics have been largely flat over the past decade, even as the size of the economy has nearly doubled.
Of course, one does not have to wait for a formal decision on whether the economy is officially in a recession or not to know that the U.S. economy is not firing on all cylinders. Even though the final estimate for real GDP in the fourth quarter of 2007 remained positive at 0.6 percent (we are still a month away from the advance estimate for the first quarter of 2008), that is still a very weak growth rate.
How weak? Because the U.S. population grew nearly 1 percent, real GDP per capita, a widely employed measure of a country’s ability to provide for the material well-being of its population, actually fell last quarter.
Looking at this series over time, we see that there have been a number of quarters in which economic growth has not kept up with population growth, and yet the economy was not formally in a recession. That is, while most of the time, when GDP per capita is negative, the economy is in recession, it is not always the case. Besides the fourth quarter of 2007, we have had two such quarters just in this last cycle—the fourth quarter of 2002 and the first quarter of 2007.
How strong should growth be going forward? Population growth has varied from nearly 2 percent in the early 1950s at the peak of the baby boom to a bit under 1 percent, about where we are now. Consequently, a 1 percent real GDP growth rate is currently needed just to maintain our current living standards. However, a healthy growth rate would be more like 2.7 percent, the sum of the expected population rate (and thus roughly the growth rate of the labor force) and long-run trend in labor productivity growth (how much more output each worker is able to produce, which the Social Security Administration estimates to be about 1.7 percent, as measured by GDP per hour worked by all workers). If the Blue Chip Forecast is correct, the U.S. economy will be back to this growth rate in the third quarter of 2008.