What Is A Recession And How Do We Know When We’re In One?

What Is A Recession And How Do We Know When We’re In One?
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For several months, we’ve been hearing from different sources that our economy is in now a recession, or about to enter one. Are we in a recession, or will we soon be in one?

Although it cannot be said with full certainly, it’s highly unlikely that we are currently in a recession. Still, the fact that so many people think we actually are in a recession, we may conclude that our economy is not in very good shape.

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Even more troubling, we are experiencing a higher rate of inflation than in any period during the last forty-five years. The prices of food, gasoline, and other goods and services have been rising at double-digit annual rates.

Inflation is a very serious problem, but an inflationary recession – which is called “stagflation” – is much more difficult to remedy than a plain recession. Just imagine our getting hit by that one-two punch! The last time that occurred was in the late 1970s and early 1980s. It may hit us again as soon as next year.

Are We In A Recession?

Let’s put our inflationary concerns aside and try to determine just if our economy is currently in a recession. Is there some measurement that can provide clear proof that we are in a recession or not in a recession?

Most people would accept this very simple measurement: If our nation’s output of goods and services declines for two consecutive quarters, then we are in a recession. In other words, if our Gross National Product – adjusted for inflation – fell, let us say, in the January-March and the April-July quarters of this year, then we would have been in a recession for the first half of this year.

Let’s look at the record. In the January-March quarter of this year, our Gross Domestic Product (adjusted for inflation) fell at an annual rate of 1.6%. In the April-June quarter it fell by an estimated annual rate of 0.6%. And in the July-September quarter it rose by an estimated annual rate of 2.6%.

If our output of goods and services had fallen again in the July-September quarter, then the recession would now be nine months long, and would last until our nation’s output began to rise again.

Looking back at all of the economic downturns since the 1940s, in most cases when our nation’s output of goods and services declined for at least two consecutive quarters, those economic downturns were classified as recessions.

So, you may ask: Why not all of them? The answer is that there is a more accurate way of determining which economic downturns qualify as recessions than simply labeling as a recession every two-consecutive quarterly downturn in our nation’s output of goods and services.

The official arbiter of when an economic downturn is classified as a recession is if the Business Cycle Dating Committee of the National Bureau of Economic Research {a private research organization) says it is.

Gauging The Economic Activity

The committee uses four crucial barometers to determine if our economy has reached a peak and then declines into recession. The main measure is total employment. If you’ve been following the recent economic news, you might recall that monthly employment has been rising by hundreds of thousands for the last year and a half.

The other three barometers are industrial production, personal income, and manufacturing and trade revenue. Each of these has been on the upswing since late 2020.

The Business Cycle Dating Committee defines a recession as “a significant decline in economic activity spread across the economy lasting more than a few months.” Granted that this definition leaves the committee plenty of wiggle room. But like it or not, these folks have the final say on what is and is not a recession.

What we’re now going to do is channel the committee’s decision-making powers to decide if the current economic slowdown could qualify as an official recession. Let’s take the two-quarter consecutive decline from January through June of this year.

Is just six months long enough to qualify as a recession? Yes! The Business Cycle Dating Committee labelled the months of March and April of 2020 as a recession. How can a recession last just two months? When 22.4 million Americans lose their jobs.

Of course, the massive economic downturn of that period dwarfed the miniscule declines in output during the first two quarters of this year.

Was the six-month decline deep enough to qualify as a recession.? In the January-March quarter of 2022 our nation’s output of goods and services fell at an annual rate of just 0.6 percent; the preliminary estimate of the April-June quarter was a decline of 1.6 percent. This figure will be subject to two revisions in the coming months.

Interestingly, the preliminary estimate of the July-September quarter was an increase of 3.2 percent.

Our economy may well fall into recession later this year or perhaps sometime next year. But my own guess – very likely in concurrence with that of the Business Cycle Dating Committee – is that our economy will not fall into a recession before at least early 2023. Or maybe not for the rest of the decade.

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Dheeru Rajpoot

I am Dheeru Rajpoot an Entrepreneur and a Professional Blogger from the city of love and passion Kanpur Utter Pradesh the Heart of India. By Profession I'm a Blogger, Student, Computer Expert, SEO Optimizer. Google Adsense I have deep knowledge and am interested in following Services. CEO - The Rajpoot Express ( Dheeru Rajpoot )

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