Friday, January 25, 2008

How to define a recession

A few days ago while talking about Tax Rebates I stated that we're in a recession. This was just a guess. But I'm sure you already knew that.

How do we define a recession? There is a public misconception that a recession is when the gross domestic product goes negative for two consecutive quarters. This is only partially correct.

Kevin Hasset had a good article in the Washington Post (syndicated in the Pioneer Press yesterday) on how recessions are defined. Stating that we're in a recession is the outcome of a group know as the National Bureau of Economic Research (NBER). Within that group, there is the Business Cycle Dating Committee.

What they do is collect a bunch of data like unemployment and GDP. Then they call a bunch of people to make sure the data are representative of the business cycle (which they should be). After all this, they get into a room and make a collective decision if there was (or is) a recession.

Because the data are not known until after a quarter, we're often on our way out of a recession (or at least in the middle of one) before the Business Cycle Dating Committee tells us.

There you have it. If someone tells you that we're in a recession, make sure you ask them how they know. If they say the NBER told us, then they are correct.

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