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When Is It A Recession? Depends On Who's Asking
The Muddy Waters Of Economic Classifications
With what has to be among the most tone-deaf moments of pedantic purity in recent history, Treasury Secretary managed to give quite a few media commentators and analysts a serious case of whiplash with her earnest insistence that the economy is not in recession after all.
Treasury Secretary Janet Yellen said Sunday that growing consumer spending, industrial output, credit quality and other economic indicators don’t suggest the economy is in a recession, although she acknowledged that “way too high” inflation is straining the system.
“This is not an economy that is in recession,” Yellen told moderator Chuck Todd on NBC’s “Meet the Press.”
Yes, she really did say that—and yes, she really did mean it. Yes, she really does believe that.
How on earth can she possibly believe that? As with so many things in economics, the start and end of a recession depends largely on what metrics you choose to use for the definition. Janet Yellen is simply using a different set of metrics and not the longstanding rule of two successive quarters of declining GDP.
Unfortunately for her, even by her alternate metrics, the economy is still in recession.
The Classic Definition Of Recession: Two Quarters Of Declining GDP
The classic definition of when the economy is in recession has long been two quarters of declining GDP. Certainly this is the definition that is behind my depictions of a “technical recession”. It is the definition many in both corporate media and the alternative media use.
It’s the definition guiding Fox News and its economic reporting:
Now here’s the latest quiz question: what is the definition of a "recession?" It’s always been two straight quarters of negative growth -- which has happened in Q1 and Q2 of this year. It has been that way for about half a century.
But now Treasury Secretary Janet Yellen and her minions are dutifully telling us it is something else. What that is, she’s not sure of. We are told by Yellen that this is a healthy economy and we are in the midst of a "great transition."
It’s the definition guiding alt-media finance newsletter “Quoth The Raven”.
As sure as the sun rises and sets each day, the technical and widely used definition of “recession” in the financial world has been agreed upon by nearly everybody in the industry and both sides of the political aisle for decades.
That definition, of course, is “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters”.
Jordan Schachtel in his newsletter “The Dossier” also relies on this definition:
An economic recession is commonly defined as a period of economic decline that is identified by a fall in GDP in two successive quarters. Now, estimates for second quarter GDP are due Thursday, and many project that the U.S. will fall into the thumb rule for a recession.
Did we get this definition wrong? No, we didn’t. But Janet Yellen is not “wrong” either—she’s just using a different definition.
That two successive quarters of declining GDP constitutes a recession is a metric that was devised by economist and Commissioner of The Bureau Of Labor Statistics during the Nixon Administration Julius Shiskin, and first appeared in the media in a New York Times article in 1974.
Julius Shiskin, the Commissioner the Bureau of Labor Statistics, has sought to come up with quantitative criteria that would show whether a recession was actually in progress. On the basis of a study of past recessions, Mr. Shiskin concludes that a current decline in aggregate economic activity would qualify as a recession if:
¶In terms of duration it lasts 9 months or longer as measured by a decline in nonfarm employment.
¶In terms of depth it includes a decline of at least 1.5 per cent in real gross national product that extends over at least two quarters (six months), and a rise in the unemployment rate of more than two points and to a level above 6 per cent.
¶In terms of diffusion; more than 75 per cent of all industries sustain declines in employment lasting six months or longer.
Over time, of the recession metrics devised by Shiskin, only the two quarters of declining GDP has endured in common usage.
What is significant to note here is that these metrics, like all metrics, are to a certain degree arbitrary. They represent Shiskin’s efforts to impose a quantitative framework on recession discussions.
As regular readers of this newsletter are already aware, I have consistently argued that the US economy has been in recession for some time already, irrespective of whether the GDP figures were technically rising or falling. Obviously, those arguments dispense with the Shiskin framework in favor of a more holistic appraisal of economic realities.
What most people might not realize is that the National Bureau of Economic Research—the US’ “official” scorekeeper for when recessions start and end—also dispenses with the Shiskin framework and has done so all along.
The NBER Definition: “Significant” Decline In Economic Activity
If the NBER does not use Shiskin’s metrics, how do they define a recession? Simply put, the NBER counts a “significant” decline in economic activity as a recession.
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.
Thus, a recession per the NBER definition need not necessarily require two successive quarters of declining GDP. It is worth noting that the 2001 recession in the wake of the tech bubble bursting on Wall Street did not show two quarters of declining real GDP.
Economists Lakshman Achuthan and Anirvan Banerji relied on the broader NBER definition to argue the existence of recession in May of 2008—before the “Lehman Brothers moment” when the world first got an indication of just how reckless Wall Street had been with so-called “derivatives”1.
A recession is a self-reinforcing downturn in economic activity, when a drop in spending leads to cutbacks in production and thus jobs, triggering a loss of income that spreads across the country and from industry to industry, hurting sales and in turn feeding back into a further drop in production - in effect a vicious cycle.
With the arrogance common among economists, they elevated the NBER definition to the status of empirical (and therefore indisputable) fact. All other definitions are simply wrong, according to them.
Similarly, the White House is rather presumptuously endowing the NBER with the “official” authority to decree when there is a recession, as if the NBER judgement in this somehow altered the actual state of the American economy.
This is, of course, quite absurd, for the simple reason that the NBER definition is qualitative and subjective, whereas the Shiskin metrics are at least notionally objective. Moreover, both the NBER and the Shiskin defining criteria for the onset of economic recession are merely somewhat arbitrary frameworks for communicating the state of the nation’s economy. They are neither more nor less substantive than Harry Truman’s more folksy definition: “It's a recession when your neighbor loses his job; it's a depression when you lose yours.”
Is Janet Yellen Correct? Not Necessarily
In assessing Yellen’s view of the economy, it is important to understand how she can conclude the economy is “strong”. Chiefly, that rosy view of things relies on the official unemployment metric from the Bureau of Labor Statistics, which puts unemployment at 3.6%.
“We’re likely to see slowing of job creation, but I don’t think that is a recession. A recession is broad-based weakness in the economy and we’re not seeing that now,” Yellen added.
However, the BLS unemployment metric is itself arbitrary2, as it does not include those no longer actively seeking employment. Those individuals are described as not being in the labor force—hence the metric I often use to evaluate the BLS’ monthly Employment Situation Report, the labor force participation rate. Reliance on the unemployment rate as the governing determinant of a “strong” labor market is at best problematic, and at worst simply unrealistic.
Does a strong labor market show a trend of rising first-time jobless claims? The US labor market shows exactly that trend.
Does a strong labor market show an overall trend of job cuts? The US labor market is showing that trend as well, according to the Job Cuts Report by Challenger, Gray, and Christmas.
At the same time, the S&P Global Composite PMI figures show economic output in the US is in overall decline.
Additionally, the regional manufacturing indices published by the Dallas Federal Reserve, the Richmond Federal Reserve, and the Philadelphia Federal Reserve all show manufacturing activity in the US in declining.
Even adopting the broader definition of recession used by the NBER, the breadth of economic indicators showing decline is irreconcilable to Janet Yellen’s assertion of a “strong” economy. While she is notionally correct that the NBER does not define a recession as two quarters of declining GDP, her view of the economy as “strong” under the NBER criteria is itself contradicted by the broad signals of economic weakness and contraction used by under NBER criteria to assess economic health. The indicators for both the overall labor market and economic output show the US economy in recession even by NBER standards.
Muddying The Waters—The Last Refuge Of The Political Economist
It requires no great understanding of economic analysis to comprehend why Janet Yellen is pushing back against the notion of the US economy in recession: such an admission would be politically devastating for the Biden Regime. With the mid-term elections fast approaching, the very last thing the White House wants is recriminations over how the economy fell into its current state. Yellen’s seeming moving of the goalposts merely demonstrates how vulnerable the Biden Regime is on the economy.
Yet no matter how much Yellen may try to muddy the waters, what is quite clear is that the US economy is not strong, is not expanding, and is not dealing with the consequences of rampant inflation at all well. The reality of the US economy is recession. The reality of the US economy is going to be recession for the near term, which is almost certainly going to be more than a couple of quarters of economic activity.
The most important lesson to be learned here is a simple reminder that indicators only describe economic reality; they are never that economic reality itself. No one indicator ever presents the complete economic picture. Even inflation gauges are merely one piece of that picture.
Janet Yellen is guilty of a simple logical error by focusing too much on narrow employment metrics, choosing to see only the signal of strength coming from low unemployment percentages while overlooking the myriad signals of weakness coming from numerous other indicators. Understanding the true state of the economy requires seeing all the signals, and reconciling the totatlity of those signals into a picture of overall economic health or weakness.
Unfortunately for Ms. Yellen, that picture at present is one of undeniable economic weakness.
The Lehman Brothers bankruptcy occurred on September 15, 2008, and is widely associated with the start of the “Great Financial Crisis”.