With the US economy reporting its second consecutive quarter of falling GDP last week, politicians, pundits and economists are locked in heated debate over whether the state of .
President Joe Biden has denied that a recession is defined as two consecutive quarters of negative growth, pointing out that the government follows the designations of the National Bureau of Economic Research (NBER), which has yet to declare a recession.
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The debate has even descended into a Wikipedia war, with the online encyclopaedia 47 edits to its definition of a recession within 24 hours. Editing rights to the page have since been restricted.
So what exactly is a recession?
There is a reason that the definition of a recession as 鈥渢wo consecutive quarters of negative growth鈥� is not the consensus of economists. For one thing, recessions in 1960 and 2000 don鈥檛 meet it 鈥� both saw multiple quarters of negative growth interspersed with periods of expansion.
There is, however, some truth to the claims by Biden鈥檚 critics. Since 1945, the US has experienced two consecutive quarters of negative growth on 12 occasions, all of which were later declared to be recessions. Double-quarter contractions might not be necessary for something to later be declared a recession, but in practice they have always been sufficient.
There are reasons for thinking this time might be different. Unemployment remains close to historic lows at just 3.6%, with the economy adding 372,000 jobs in May alone. By contrast, every recession on record has seen a sharp increase in unemployment.
That doesn鈥檛 mean the US is in entirely uncharted territory. Unemployment sometimes only begins to rise well after a recession has begun, making it what economists call a 'lagging indicator'.
That lag can be significant. During the first nine months of the 1973鈥�75 recession, the US economy added more than a million jobs. The real jobs crunch didn鈥檛 kick in until October 1974 鈥� nearly a year after the recession formally began. Similarly, in 1980, it took three months for the recession to reach the labour market, which had busily added 332,000 jobs in the meantime.
As the Financial Times's Robert Armstrong has , this should be particularly alarming given the parallels between the 1974 recession and today鈥檚 crisis. Unlike 2008, both 1974 and 2022 are inflationary, supply-driven crises centred on global energy markets.
That said, the parallels are far from perfect. In 1976, 27% of workers were covered by , a figure that had fallen to 12% by 2021. Not only were workers harder to fire, they were easier to replace. As Armstrong notes, the 1970s saw a massive increase in female labour market participation, partially offsetting the recession-induced jobs crisis. For men, the employment downturn began in January 1974 鈥� just two months after the official onset of the recession.
Whether or not the US is in recession, the situation is unprecedented. No recession has seen such sustained strength in the labour market, and no period of non-recession has seen such a sustained contraction of GDP. In that context, it is no wonder that the NBER is holding off its official designation until more data becomes available.
