National Bureau of Economic Research - Recession Markers

Recession Markers

The NBER is well known for its start and end dates of US recessions. The NBER uses a broader definition of a recession than commonly appears in the media. The traditional definition of a recession is two consecutive quarters of a shrinking gross domestic product (GDP). In contrast, the NBER defines a recession as "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.". Business cycle dates are determined by the NBER dating committee under contract with the Department of Commerce. Typically, these dates correspond to peaks and troughs in real GDP, although not always so.

The NBER prefers this method for a variety of reasons. First, they feel by measuring a wide range of economic factors, rather than just GDP, a more accurate assessment of the health of an economy can be gained. For instance, the NBER considers not only the product-side estimates like GDP, but also income-side estimates such as the gross domestic income (GDI). Second, since the NBER wishes to measure the duration of economic expansion and recession at a fine grain, they place emphasis on monthly—rather than quarterly—economic indicators. Finally, by using a looser definition, they can take into account the depth of decline in economic activity. For example, the NBER may declare not a recession simply because of two quarters of very slight negative growth, but rather an economic stagnation. However, they do not precisely define what is meant by "a significant decline," but rather determine if one has existed on a case by case basis after examining their catalogued factors which have no defined grade scale or weighting factors. The subjectivity of the determination has led to criticism and accusations committee members can "play politics" in their determinations.

Though not listed by the NBER, another factor in favor of this alternate definition is that a long term economic contraction may not always have two consecutive quarters of negative growth, as was the case in the recession following the bursting of the dot-com bubble."The NBER's Business Cycle Dating Procedure: Frequently Asked Questions". The National Bureau of Economic Research. http://www.nber.org/cycles/recessions_faq.html. For example, a repeated sequence of quarters with significant negative growth followed by a quarter of no or slight positive growth would not meet the traditional definition of a recession, even though the nation would be undergoing continuous economic decline.