A Recession by Any Other Name

An economic downturn is a political problem, so the White House is playing semantics by redefining the term.

By Phillip W. Magness. Excerpts:

"Economists have long defined a recession as “a period in which real GDP declines for at least two consecutive quarters,” to quote the popular economics textbook by Nobel laureates Paul Samuelson and William Nordhaus. This definition isn’t perfect, but it describes almost every downturn since World War II."

"The great recession of 2007-09, for example, had already been under way for a year before the NBER released its determination. Sometimes recessions end by the time NBER classifies them, and this built-in delay limits the utility of NBER scorekeeping for real-time policy decisions."

"There is no federal statute that appoints the NBER as the official arbiter of recessions. Quite the contrary, the federal government has historically followed the conventional textbook definition. The Gramm-Rudman-Hollings Act of 1985, which attempted to rein in the deficit by triggering mandatory sequestrations in federal agencies, introduced a recessionary escape clause for tough economic times. If the Congressional Budget Office projected a recession, Congress could fast-track a vote to suspend the sequestrations. The law defined a recession as a period when “real economic growth is projected or estimated to be less than zero with respect to each of any two consecutive quarters.”" 

"Derivative language still appears in the federal statute books, and it has long been used as a basis for other counter-recessionary measures governing federal employment. Canada and the U.K. also employ the two-quarter definition to designate the onset of a technical recession, further attesting to its legitimacy."

In 2000, Paul Krugman used the 2 quarter rule. See Reckonings; The Japan Syndrome. Excerpt:

"And so it came as a shock last Sunday when a senior official admitted that the Japanese economy has almost certainly been shrinking for the last two quarters, which means that by the usual definition it has slipped back into recession."