Who Determines If We’re In a Recession?

The first or advanced reading of second quarter GDP was reported at -0.9%, which follows the -1.6% final reading that was reported for the first quarter. While it’s possible that the reading for the second quarter may be revised when the second and final readings are reported on August 25 and September 29 respectively, as of now we do have two consecutive quarters of negative GDP.

So, does that mean the referee for recessions, the National Bureau of Economic Research (NBER), will call a recession?

Let's review the NBER's commentary regarding how they call recessions.

The NBER's definition emphasizes that a recession involves a “significant decline in economic activity that is spread across the economy and lasts more than a few months.” There are three main criteria: depth, diffusion and duration. While each needs to be met individually to some degree, extreme conditions seen in one criterion could outweigh weaker signals from another.

The NBER also makes a separate determination regarding the dates of “peak” and “trough” months in economic activity.

The peak is the “month in which a variety of economic indicators reach their highest level, followed by a significant decline in economic activity.” A trough is the month “when economic activity reaches a low point and begins to rise again for a sustained period.”

The interval between the peak and the trough designates a recession, a period when economic activity is contracting. The subsequent period designates an expansion when economic activity is increasing.

As an example, let’s look at the recession that occurred in 2020 at the start of the pandemic. After the peak in economic activity in February 2020, the committee concluded that the subsequent decline in activity had been “so great and so widely diffused throughout the economy” that, even if it proved to be quite brief, the downturn should be classified as a recession. The committee subsequently determined that the trough occurred just two months after the peak, in April 2020. 

The economic data the NBER pays most attention to when determining peaks and troughs are real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production. In recent decades, the two measures they have put the most weight on are real personal income less transfers and nonfarm payroll employment.

While two consecutive quarters of negative GDP is not the official definition of recession, the reason why it became a Wall Street rule-of-thumb is that we have never had successive quarterly declines in real GDP without there being an actual NBER-defined recession eventually.

This is why it’s crucial to stay informed regarding the upcoming second and final readings for second quarter GDP, as well as other crucial employment and economic reports the NBER will be monitoring in the weeks and months to come.

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