Monday, September 20, 2010

The Recession Ended Over a Year Ago

This is no surprise: the NBER has just declared that the recession ended in June 2009.  What is also not going to be a surprise are the inevitable and endless comments from the lay population about how if the recession is over how come I don't feel better?  It is a good question and highlights the problem with economic terms and the ability of the profession to communicate effectively.  Many people realize that a recession is just that, when the economy is in recess or not growing.  In fact the key characteristic of a recession is prolonged negative growth.  Yes they take more into account than that, but it is the basic metric.

This appears in contrast to how people tend to think of recession not being over until we have returned to where we where prior to the onset of the downturn.  A medical analogy is apt: killing of harmful bacteria that have made you ill, versus recovering to your pre-illness strength.  Economists using the term recession are speaking only of the first part.

Which, of course, suggests that economists might want to think about coming up with a pair of terms that describe the contraction and the recovery.  In fact they could use those two terms and officially date the contraction (instead of recession) and come up with a definition of recovery based on unemployment numbers, GDP per capita, etc.  The problem is in defining these.  Often recessions follow periods of overheating in the economy, so waiting for unemployment levels that immediately preceded this downturn could take decades.  But getting back to 6%, rather than 4% is probably enough to declare the recovery.  The problem is economists like precision and it would be very difficult to come up with a set of benchmarks to define the recovery (perhaps within 25% of the levels of peak unemployment and GDP per capita in the year prior to the official start of the contraction).

At any rate the NBERs declaration of the end of the recession in June 2009 is unlikely to make anyone feel any better and will inevitable lead to the derision of economists.  But we are used to it.


1 comment:

Jeff Alworth said...

I think you're onto something. The issue is that there are a whole basket of terms that indicate economic health, but we tend to use a single measure when talking about whether things are good or bad: whether the economy is growing.

For a lot of people, unemployment is a more potent measure and whether there's very minor growth is beside the point when no one has a job.

As a labor-oriented guy, the measures I look to more often are wage growth and employment, but these are somewhat antithetical to the goals of the business-page set. So they get little mention. It would be nice if there was a completely separate measure that referred specifically to labor health. A Case-Schiller kind of index. That way, the standard report might be, "while the US technically exited its recession a year ago, the blobbity-blah index of worker health is at a 59-year low."

You should get on that.

(Interestingly, looking at my word verification below, it's "surges," which somehow seems appropriate to the topic at hand.)