Recession: The Forgotten Indicia

This piqued my interest (via Mike Simonson):

Ignorance about recessions has taken hold because of a simplistic idea that a recession is two successive quarterly declines in gross domestic product (GDP), a measure of the nation's output.

The idea originated in a 1974 New York Times article by Julius Shiskin, who provided a laundry list of recession-spotting rules of thumb, including two down quarters of GDP. Over the years the rest of his rules somehow dropped away, leaving behind only "two down quarters of GDP."

Of course, now that the NYT's archives are available online, I went straight to the original article to see what the other rules of thumb were.

Shiskin breaks his rules down into rules of thumb for duration, depth, and diffusion - all of which are necessary, in his view, for a bona fide recession, although ultimately identifying recessions must be qualitative and not quantitative. In any case, here are the rules of thumb:

• Duration
  • A decline in real GNP for 2 consecutive quarters
  • A decline in industrial production over a six-month period
• Depth
  • A 1.5% decline in real GNP
  • A 1.5% decline in non-agricultural employment
  • A two-point rise in unemployment to at least 6%
• Diffusion
  • A decline in non-agricultural employment in more than 75% of industries, as measured over six-month spans, for 6 months or longer

If you use these criteria, I think it's pretty clear we're not in a recession - I mean, we're not even close to a 1.5% decline in real GNP, nor to a two-point rise in unemployment. I'm not sure I fully understand Shiskin's diffusion criterion, but I don't think it obtains, either.

Of course, there's no particular reason we should judge a 2008 recession using 1974 criteria. It's just worth noting that if all of Shiskin's rules of thumb were actually happening, people would be moaning a lot more loudly than they are right now.

Comments

[Russ Abbott:]

It's never been clear to me why we care so much about whether the label "recession" applies to a particular situation. (The only real reason we might care is if there are legislated or regulatory procedures that kick in if it does apply. That may be the case. But it's also a special case, and I don't see any of the discussions of whether we are in a recession referring to any of these specifically.)

In general it really doesn't matter what label applies; what matters is what's happening. It makes no difference whether a particular label applies to someone who is (or isn't) out of a job or to someone who makes (or loses) money in the market. What matters are the concrete facts on the ground, not an aggregated label that may or may not loosely summarize those facts.

If unemployment is at 10% but GNP has not declined by 1.5% things are still very bad even though that situation may not fit the formal definition cited in the article.

Let's stop worrying about whether the economy is "in a recession." It's state is what it is. The question for Seeking Alpha is what implications the current state and future direction of the economy have for the markets.

2008 May 25 12:45 PM

[Danny Newton:]

The federal government has rules about contracts that try to push activity toward areas of underemployment or "labor surplus areas." There area also economic criteria for the government to qualify counties as economically under-performing. This designation has expanded the help given to real Appalachian areas to states all over the south. Unfortumately, the number of qualifying counties seems to expand no matter how good the times are. Instead of being proof that the program is not working, it seems to some to be proof that more redistribution needs to be done. The federal government has rules about contracts that try to push activity toward areas of underemployment or "labor surplus areas." There area also economic criteria for the government to qualify counties as economically under-performing. This designation has expanded the help given to real Appalachian areas to states all over the south. Unfortunately, the number of qualifying counties seems to expand no matter how good the times are. Instead of being proof that the program is not working, it seems to some to be proof that more redistribution needs to be done.

2008 May 25 04:12 PM

[karmaguy:]

To Felix Salmon: That you actually believe any statistic published by the government is in itself very scary. That would be like saying you actually believe that inflation is running at a 2.4% rate over the past year. Do you?

2008 May 26 12:10 AM

[karmaguy:]

To Felix Salmon: That you actually believe any statistic published by the government is in itself very scary. That would be like saying you actually believe that inflation is running at a 2.4% rate over the past year. Do you?

2008 May 26 12:10 AM

[JREB777:]

Karmaguy hits the spot.
GDP is measured by growth minus inflation.
If we take current growth 3% minus real inflation 6% and going higher then we get our current real GDP growth of -3% well within recession territory.
The reality is that while government figures are correct, they don't tell the truth now but they will in the future.

2008 May 28 06:02 AM