Are We in a Recession?

The honest answer is that we cannot provide an answer in real time.

The rule of thumb is that a recession is two or more consecutive quarters of negative growth in real GDP. The latest estimate of 4th quarter GDP was 0.6%. Not negative, but certainly not great. So to say that we are in a recession, according to this rule of thumb, is to say that we have knowledge that the current quarter's growth rate is negative and either or both of the following:

1. 4th quarter GDP growth from 2007 will be revised below zero when the next estimate is released on March 27.
2. 2nd quarter GDP growth from 2008 will be negative.

I don't see how anyone could be sure of this. The starting point for 2nd quarter GDP itself is not known and will not be officially estimated in advance form until late April. There is already considerable monetary and fiscal stimulus in the pipeline that will begin to have an impact over the second quarter.

Then NBER has a broader defintion of a recession than the rule of thumb:

A recession is 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. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion.

So to assert that we are in a recession is a claim that a peak has occurred, that the subsequent decline is significant, that the decline will last more than a few months, and that the decline will be evident in many if not all of the indicators listed in the definition. What do the indicators say?

• The Real GDP growth has been positive thus far according to official estimates (as noted above).
• Real personal income less current transfers, with data available through January, peaked in September 2007 (see Table 1 for income and transfers and Table 9 for the price deflator) but has fallen only 0.3% since then. We get February data on March 28.
• Employment peaked in December 2007 and has fallen by less than 0.1% over the subsequent two months.
• Industrial production fell from September to October 2007 and then rebounded to achieve the same index value in January as it had in September. We'll learn about the February value on Monday.
• Wholesale-retail sales. Wholesale trade fell slightly between November and December but more than made up the decline in January. (February data are released on April 9.) Retail sales fell between January and February.

Each of these indicators seems to be some version of flat. It is premature to be making pronouncements like this these, from Congressman Frank and Senator Dodd:

“We are in a recession now that has an unusual cause. It is not your usual cyclical problem… This is a structurally caused recession,” Mr. Frank told reporters at a press conference. Mr. Dodd, also appearing at the press conference, had an even gloomier take.

“This is the worst housing crisis in our lifetime. We are in a recession. People want to talk about ‘Are we?’ — we’re in one. The question is: how deep is this going to go? How long lasting will it be? The underlying economic conditions in our country are not good for resolving this. Almost every other recession we can talk about lasted eight months. When you’ve got deficits running as high as they are — The value of the dollar… inflation going up, unemployment going up, these are not great underlying economic circumstances to respond to the situation.”

They are right that the present period is different from past recessions--first, because we cannot assert that it is a recession, and second, because we have already stretched our policy responses just about as far as they will go.