In or out of recession?

A friend on another site just posed this question.

Why is it that a recession is described as two or more successive quarters of “negative growth”, but being out of recession is just one quarter of (estimated) growth?

I felt emboldened to pen an answer as follows ….

In Britain, the definition of recession-emergence is from the same school of economics as growth predictions for next year (any year), which are always about 5 zillion% more than actually turns out to  be the case.

Recession in Britain

The cunning  idea is that future growth will be vast enough to cover the even vaster existing debts and commitments. And, of course, by the time we KNOW what the growth actually turned out to be, most people will have forgotten the predictions on growth from the financial and economic wizards running the country. That’s also one of the great things about a new mess or crisis; it always takes the mind off previous crises, which are likely to be ongoing but less in the media and therefore not to be bothered about too much.

This is, of course, in addition to the fact that growth in itself is incompatible with reducing global warming, but here we are getting a bit too technical.

Well, that’s how we do it in Britain anyway. How do you manage it over there?

by Chris Snuggs

A reply from a U.S. economist.

Hello there Chris!

Recession in the U.S. is also defined as two successive quarters of negative GDP growth.  At least, that’s how its officially defined.  And to add my answer to your friend’s question — either the economy is either in a recession — i.e., two or more consecutive quarters of negative GDP growth — or it isn’t, which means that the string of negative GDP growth rates is broken.  And that only takes one quarter of positive growth.

Most of the economists I know personally tend to look at a bigger picture than the stated GDP figures, however.   I focus on capital and labor utilization rates as I believe that they are more important measures of a well-functioning economy.  The final GDP figures in both of our countries are national income accounting figures, and have all the weaknesses of any income statement variable.   They are flow variables, which ignore the stock of economic wealth.   For example, if you invest $100 this year in the stock market, and it grows in value by $20, only the $100 is counted. The increase in wealth is never captured in measures of GDP.

Another problem with current measures of GDP and GDP growth is that government spending is considered on par with private spending, which brings into question the sustainability of growth measures based on GDP, although President Obama and perhaps Prime Minister Brown are both fine with growth rates being fueled by large increases in government spending.  Finally, a significant fraction of economic activity, like the value of work in the home — is not measured.

So, yes, the official measurement of GDP is all wrapped up in technicalities.  But most economists I know pay little attention to it.  They are more concerned with how well the economy is functioning, whether the growth is sustainable, and whether people who want to work can find work.  If you are unemployed, the economy is in a recession, regardless of what the GDP figures say!

by Sherry Jarrell

2 thoughts on “In or out of recession?

  1. Economic growth can be either positive or negative. Negative growth can be referred to by saying that the economy is shrinking. Negative growth is associated with economic recession and economic depression.

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    1. Economic growth can be either positive or negative. Negative growth can be referred to by saying that the economy is shrinking. Negative growth is associated with economic recession and economic depression.

      data recovery

      Like

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