What Is A Recession Anyway?

I say that because all of the sudden it appears the classic definition of a recession (two or more consecutive quarters of negative GDP growth) has been squashed. For the first time, it is becoming agreeable that a group of economists in Boston ultimately get to decide if and when a recession has occurred. As a result, we won’t know until after it is over when it actually took place because they will be the official referees. And it appears they can use any metrics they want to make such a determination. How silly!

I’m not sure when it was decided that six months of negative economic growth was no longer a good barometer of recessions, but I could hazard a guess. You see, if you look at the final, revised numbers from the 2000-2002 economic downturn (widely asserted to be the last recession) you will see that there were never two consecutive quarters of negative GDP growth. Therefore, we can either say that period was merely a sector-specific, Internet bubble being burst, or we can change the definition of a recession and claim that it was indeed a recession because a group of economist say so. Clearly, the latter option has won out.

So here we find ourselves in a world where people take sides arguing that we will or will not have a recession, but we admit that we won’t know for sure until it’s over. All of this furthers my opinion that whether or not we have an official recession or not is largely irrelevant. Is the stock market really going to react meaningfully different if we have two consecutive quarters of negative growth, or simply one quarter down, one quarter up, and another quarter down after that? If economists get to have the final say after the fact, then we won’t know about a recession for sure until it’s over (when the market has already turned up again), so the official ruling won’t matter to investors.

The bottom line is that the economy will always go through cycles. It’s called a business cycle for a reason. The only thing that will solve the problems we face is time, so I think we should all just be patient, wait it out like all long term investors should do, and stop all this recession talk nonsense. Of course, that is extremely wishful thinking, but that’s what I’m going to do regardless.

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2 Thoughts on “What Is A Recession Anyway?

  1. Anonymous on January 22, 2008 at 10:38 AM said:

    The Gipper got it right in 1979:

    “Recession is when your neighbor loses his job. Depression is when you lose yours. And a recovery is when Jimmy Carter* loses his”.

    * To update, substitute the current Oval Office occupant.

  2. tglaser8 on January 23, 2008 at 2:02 PM said:

    You mentioned the “Business Cylce”. Let’s not forget that all cycles are based on human emotion/psychology. A breather for a year or two may be very necessary for the next meaningful advance. Without dark there is no light.

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