White House challenges common definition of ‘recession’ — here’s what to know

Commonly, a recession is understood as two consecutive quarters of a declining GDP.

But economists in the Biden White House recently claimed that that is not the official definition of a recession, nor an appropriate one.

Here’s what to know:

Who defines a recession?

There is no official government definition of a recession.

Instead, government officials, economists, and many others use recession designations provided by the National Bureau of Economic Research, a private academic group. It doesn’t provide a concrete definition. Instead, it relies on the judgment of a group of economists.

Still, there are some drawbacks to looking to the group to declare a recession, chief among them being that it can take months for the group to announce a period is recessionary, meaning that the economy could be in a recession but the group just hasn’t declared it given the lag time.

The Bureau of Economic Analysis, which tracks the country’s GDP growth, doesn’t have its own definition of a recession. When contacted on Monday, a spokesperson pointed the Washington Examiner to the National Bureau of Economic Research’s definition. Similarly, a spokesperson for Congress’s Joint Economic Committee also said that the committee relies on that description.

So, what does a recession entail?

The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

Notably, the group does not define a recession as two consecutive quarters of negative GDP growth. On a question-and-answer page on its website, the group clarifies that it doesn’t do so because it doesn’t identify economic activity “solely with real GDP, but consider[s] a range of indicators”

“Second, we consider the depth of the decline in economic activity. The NBER definition includes the phrase, ‘a significant decline in economic activity.’ Thus real GDP could decline by relatively small amounts in two consecutive quarters without warranting the determination that a peak had occurred,” the group contends.

Tara Sinclair, a professor at George Washington University, told the Washington Examiner that a recession is seen by economists as “broad-based economic decline” and said that decline wouldn’t just be marked by one indicator.

Where did the two quarters of negative growth rule of thumb come from?

It isn’t readily clear when or where the idea that two quarters of negative growth equals a recession originated, although in almost every case, the adage is true and it has, historically, been a reliable recession indicator.

All of the past 12 recessions identified by the National Bureau of Economic Research have seen at least two quarters of negative GDP growth, and, conversely, each instance of at least two quarters of negative GDP growth has later been declared a recession.

“For years … including right now, if you pick up a lot of principles of macroeconomics textbooks, they will say that in there,” Victor Claar, an economics professor at Florida Gulf Coast University, told the Washington Examiner about the adage. He noted that the current economic paradigm is causing the idea to be questioned.

What makes this economic slowdown different than those of the past?

One reason economists might be wary about declaring the current situation a recession, even if Thursday’s numbers indicate negative second-quarter growth, is the booming jobs market.

Even as GDP has declined, jobs have increased — two factors typically seen as contradictory. The economy beat expectations and added 372,000 jobs in June, more than was expected. The unemployment rate also remained at 3.6% in June, matching the low level it was at right before the coronavirus pandemic struck.

The tight labor market, although starting to show signs of cracking, will likely be a big variable as the National Bureau of Economic Research analyzes the economy. Layoffs are still rare, although they are starting to quicken, and weekly jobless claims have begun to start inching upward.

Also, while the GDP decreased by 1.6% in the first quarter, gross domestic income, which is another important measure of economic output, actually increased by 1.8% during that same period. The average of the two metrics was also in the black. In other words, the economy might not be shrinking at all, when properly measured.

Has there ever been an instance of two quarters of contraction that wasn’t defined as a recession?

The short answer is no, with a caveat.

The only period since World War II that there were two consecutive periods of negative GDP growth and no recession was in 1947, according to Sinclair. Hence why the rule of two consecutive quarters of negative GDP growth has been known to be so reliable.

It is also worth noting that there was a recession in which there were not two consecutive quarters of decline during the brief recessions in 1970 and 2001.

What are the politics at play?

With heated midterm elections on the horizon, the economy is the No. 1 issue on the minds of voters.

Soaring inflation is already the No. 1 concern among the electorate. The last thing that Biden and Democrats need is a recession. That is enough reason for White House economists to publish a blog post preempting Thursday’s report that pushed back on the narrative that two consecutive quarters of negative GDP growth constitutes a recession.

“While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle,” the White House said.

Likewise, Republicans have attacked the White House’s messaging and accused the administration of attempting to move the goal posts about what defines a recession.

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While Thursday’s numbers are yet to be seen and the consensus forecast is for slight positive GDP growth, the White House has cause for concern.

The Atlanta Fed’s “GDP Now” tracker is now predicting that gross domestic product growth will decline by 1.6% for a second straight quarter.