Some assert that when public opinion polls show Most people think we’re in a recession, we’re in a recession, by definition. Some people think that when GDP comes in for two consecutive quarters, we are in a recession. Well, any given person can define a banana as a spherical fruit, but sometimes it is useful to define what decay is, as defined by the scholar who coined the term, or understood to be the official arbiter of the term terms.from NBER Business Cycle Dating Council FAQ webpage:
Q: What is the basic work of the Business Cycle Dating Committee?
A: The NBER’s Business Cycle Dating Committee maintains a chronology of the U.S. business cycle. The chronology identifies the dates of the months of peak and trough economic activity. The peak is the month in which various economic indicators reach their highest levels, followed by a significant decline in economic activity. Likewise, a month is designated as a trough when economic activity hits a low point and begins to rise consistently and consistently.
Q: What is a recession? What is an extension?
A: The NBER’s traditional definition of a recession is a significant decline in economic activity that spreads across the economy and lasts for more than a few months. The committee’s view is that while each of the three criteria of depth, spread and duration needs to be met individually to some extent, extreme conditions revealed by one criterion may partially offset weaker signs of the other. For example, in the case of a peak in economic activity in February 2020, we concluded that the decline in economic activity was so large and so widely spread across the economy that even if it proved to be very short-lived A recession should also be classified as a recession. The committee then determined that the trough occurred two months after the peak, in April 2020. An expansion is a period when the economy is not in recession. Expansion is the normal state of the economy; most recessions are short-lived. However, it will likely take considerable time for the economy to return to its previous peak levels of activity.
Here is a stylized chart:
resource: model investment.
You can see how actual business cycle dates in the US correspond to this graph in this chronology (National Bureau of Economic Research page). This is the NBER’s shaded grey date and unemployment rate.
Note that NBER is not plotted against GDP – not because it does not focus on GDP – but because the NBER BCDC focuses on a large number of series other than GDP.
Jeffrey Frankel, a 25-year veteran of the NBER BCDC, explains the approach in this article postal. He elaborates on why we are not in a recession right now postal from last week.
That’s not to say that the NBER BCDC is the only thing to say about when the recession will start and when it will end.Jim Hamilton’s metric is a GDP-based measure, latest assessment here. However, thanks to seminal research by Arthur Burns and Wesley Mitchell (see Measuring business cyclesNational Bureau of Economic Research, 1946) established this peak/trough expansion/contraction-recession nomenclature because of the BCDC statement on when a recession begins and when an expansion ends.
Different countries will use different standards (see here postal which agencies or organizations define contraction/expansion in other countries). The sets of variables are often different (sometimes two consecutive quarters of GDP growth), but the framework shown in the stylized chart is often the core of the approach (eg ECRI).For example, Laurent Ferrara’s discussion of the French business cycle New Year’s Table (in this Economy Browser Posts) is built around this peak/trough expansion/contraction framework.
Note that, as far as I know, no one uses sentiment indicators as indicators of recessions (though they may be recession-related). Chin (2022) Note that this correlation is not perfect.
