- The US has entered a recession – and the UK is expected to follow
- But defining and designating recessions is fraught with difficulty
There is no ‘official’ definition of a recession, although there is a commonly used rule of thumb: two consecutive quarters of decline in a country’s real gross domestic product (GDP). As an approximation, it is pretty good – it reflects the fact that economic activity has declined, but means that small dips aren’t given too much weight.
On these terms, the US economy has entered a recession, contracting by 0.9 per cent in the second quarter, having already shrunk by 1.6 per cent in the first quarter of 2022, as the chart shows. But there is a heavy caveat: although the US has entered a ‘technical’ recession, it is not yet in a ‘true’ one.
In the US, ‘true’ recessions are designated by the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee. It takes a more holistic approach, defining a recession using a broad range of macroeconomic indicators, and abandoning the ‘two consecutive quarters’ rule in favour of an examination of phases of the business cycle. Crucially, the committee “places particular emphasis” on personal income and employment figures.
By this wider measure, the US isn’t recession-bound yet. In a press conference on 28 July, treasury secretary Janet Yellen, while not an objective figure in this debate, argued that the US economy saw over a million jobs created last quarter, while consumer and business spending is still growing. Yellen says that "most economists and most Americans have a similar definition of recession: substantial job losses and mass layoffs, businesses shutting down, private sector activity slowing considerably, family budgets under immense strain", and concludes "that is not what we're seeing right now when you look at the economy".
The situation in the UK is similarly mixed. The Bank of England now expects the UK to enter a recession lasting five quarters in the final three months of this year, driven by the adverse impact of the sharp rises in global energy and tradeable goods prices on UK household real incomes. But despite the gloomy outlook, we will be safe from ‘technical’ recession for some time yet: Q1 2022 and Q4 2021, saw positive real GDP growth of 0.8 per cent and 1.3 per cent respectively. Q2 real GDP figures are due for release on 12 August, and low (but positive) growth is anticipated.
This highlights another challenge: determining the start and end points of a recession. A ‘technical recession’ is only called after two consecutive quarters of economic contraction, meaning that economies sit mired in recession for months before they are officially designated. The US NBER takes a more flexible approach to dating. By its definition, a recession starts just after an economy reaches a peak of activity, and ends as the economy reaches its trough. This means that recessions are often designated months after they have started – or, as was the case for the US in 2020, long after the economy has already recovered.
Is a retrospective definition much use in practice? We know that recessions worry companies and households, and Google analytics data suggests a keen desire for information – worldwide searches for ‘recession’ are currently near their all-time high. The University of Leicester’s Kevin Lee and the University of Melbourne’s Kalvinder Shields argued in 2011 that “the primary purpose of studying the timing of recession is for real-time decision-making”. Rather than waiting for retrospective designations, they advocated for the use of ‘nowcasts’, which map economic trends in real-time.
Research from the Office for National Statistics (ONS) notes that GDP statistics are revised with surprising frequency: often, a mild-contraction proves to be nothing more than a period of slow growth when final data comes in. This makes the ‘two consecutive quarters of negative real GDP growth’ rule more fallible. But it also makes the use of real-time data riskier – as the ONS notes, there is an “inherent trade-off between timeliness and accuracy”. Calling a recession too late might not feel particularly useful. But given today’s low levels of consumer and business confidence, designating one incorrectly could cause significant harm, too.
