Friday, December 7, 2007


There has been a lot of talk recently in the financial news about the big “R”… recession. If you’ve tuned in to any business channel in the last week you would have inevitably heard at least one talking head espousing their prediction of whether or not the US will enter a recession. We all know that a recession is bad but what exactly does it mean? And how do we know when we get there?

There is no absolute universal definition of a recession however, the definition used in the press and financial media is simply “two or more consecutive quarters of real GDP decline.” However, I prefer the description given by the National Bureau of Economic Activity (NBER):

“It's more accurate to say that a recession-the way we use the word-is a period of diminishing activity rather than diminished activity. We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when the economy is contracting. The following period is an expansion. Economic activity is below normal or diminished for some part of the recession and for some part of the following expansion as well. Some call the period of diminished activity a slump.”

The above description describes why it’s so hard to both predict recessions and determine if we are in one. By their very definition you have to use historical data to identify the “trough” or “slump” between the periods of economic expansion.