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The recession or the difficulty of a single definition

It happens that Wikipedia is exploited for the purpose of influencing public opinion in commercial or legal matters. On the other hand, isn’t it surprising that the field of economic theory bears the brunt of this? The thing is however very real. On July 29, Wikipedia took the decision to block any modification on its page which deals with the recession, following a phenomenon of “editing war”. Frantically, a series of contributors kept saving and undoing changes to the definition of recession.

This attempt to influence the economic debate comes in the wake of Joe Biden’s refusal to qualify the American economy as in a state of recession. In a statement to a group of business leaders gathered at the White House on July 28, the US president said: “There is going to be a lot of discussion today on Wall Street and among pundits about whether we are in recession. (…) But if you look at our labor market, consumer spending and business investment, we also see signs of economic progress in the second quarter.”

Earlier in the day, Treasury Secretary Janet Yellen spoke to reporters, calling for “avoiding a semantic battle” over whether the country’s economy is in a recession.

Two quarters is not significant

As US GDP growth recorded negative values ​​in the first and second quarters of the year that day, -1.6% and -0.9% respectively, the media and commentators quickly concluded that the recession was affecting United States. And they are not wrong, from the point of view of the notion of technical recession. “In general in the press, with two quarters of negative GDP growth, we speak of a recession”, observes Peter Vanden Houte, chief economist for Belgium and Luxembourg at ING, contacted by Paperjam. As for them, “economists tend to call it a technical recession,” he explains, adding: “It does not necessarily correspond to a real recession.”

Usually in the press, with two quarters of negative GDP growth, we talk about a recession. Economists tend to call it a technical recession instead. It does not necessarily correspond to a real recession.

Peter Vanden Houte,&nbsp chief economist, Belgium and Luxembourg,&nbsp ING

With the technical recession, the reading grid remains limited. “US growth has been negative for the last two quarters, but if you compare the second quarter of 2022 with the second quarter of 2021, on the other hand, there is growth of +1.6%. (…) In this case, we cannot really speak of a recession”, observes Peter Vanden Houten. Bringing more finesse, this way of calculating determines the recession as negative year-on-year growth. However, “very few countries use this definition”.

Anticipating the debate, the White House published an article on its website on July 21 which declared the National bureau of Economic research (NBER) as “the official marker of the recession”. The article then explained that the NBER defines a recession as “a significant decline in economic activity that spans the entire economy and lasts for more than a few months“. To do this, the NBER examines variations in six factors:

Since December 2021, the variables for measuring a recession have been on the rise in the United States.  These variables go beyond the simple measure of variation in GDP.  Bank of America

Since December 2021, the variables for measuring a recession have been on the rise in the United States. These variables go beyond the simple measure of variation in GDP.

Bank of America

Since December 2021, it is clear that these six factors have only increased, despite a decline in GDP in the last two quarters. In view of such an evolution of these criteria, it is difficult to describe the American economy as being in recession.

At the maneuver, private organizations

However, the announcement of a recession may be late. “The NBER usually takes a long time before declaring a recession,” says Peter Vanden Houten. “In the past, there have been times when the recession was nearing its end or was already over by the time the NBER determined its start date.” Indeed, the NBER can only release its conclusions once all the data has been published and the trend is confirmed.

Although mentioned by the Biden administration as the organization in charge of deciding on recessionary matters, the NBER does not have the status of an official body. On its website, the NBER presents itself as “a private, nonpartisan organization.” Based in Cambridge, Massachusetts, the organization is supported “by grants from government agencies and foundations, corporate and individual contributions, subscription income, and portfolio income.”

In the past, there have been times when the recession was coming to an end or was already over by the time the NBER determined its start date.

Peter Vanden Houte

Peter Vanden Houte,&nbsp chief economist, Belgium and Luxembourg,&nbsp ING

On the other side of the Atlantic, it is the Center for Economic Policy Research (CEPR) which is in charge of determining the periods of recession for the euro zone. Like its American cousin, CEPR is registered under private status and operates on “a diversified funding base,” according to its website. “Funds are raised from the private sector, the public sector and foundations. (…) They include companies such as investment banks, advisory firms, asset managers and government agencies.” While the financial sector constitutes two-thirds of the members of CEPR, it also counts on the support of public bodies such as the European Central Bank (ECB), certain central banks of the European Union, the World Bank and the Monetary Fund international (IMF).

Interestingly, the CEPR which oversees the measurement of the recession in the euro zone is based in London, that is in a country which is not a member state of the monetary zone.

GDP alone is not enough

Although it analyzes the volume of GDP, the CEPR does not stop there, responding to some criticism. “If demand remains strong, we cannot really speak of a recession, even if the GDP suffered a temporary contraction”, notes Peter Vanden Houten. And to continue: “GDP can sometimes be negative because of certain one-off effects, particular events that cause, for example, companies to supply their orders from their inventories.” Thus, the CEPR defines a recession as a significant decline in economic activity over two consecutive quarters among five factors:

It is quite possible that the recession started four or five months before the CEPR declared a recession situation.

Peter Vanden Houte

Peter Vanden Houte,&nbsp chief economist, Belgium and Luxembourg,&nbsp ING

The CEPR carries out its analyzes on a quarterly basis, based on data published by Eurostat. “There is a lag between the publication of the data and the announcement of a recession”, raises the chief economist of ING. “It is quite possible that the recession started four or five months before CEPR declared a recession situation.”

Pending the official publication of the phase of the economic cycle – expansion or recession – forecasters are currently counting on the recession as base scenario in Europe, induced by various surveys and indicators that serve as weak signals for the short-term trend.

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