(Download the full report HERE)

Executive Summary

• Recessions are a natural phase of the economic cycle that are usually interpreted as consecutive quarters of negative GDP growth
• While negative GDP growth readings often coincide with recessions, recessionary periods are officially designated by the National Bureau of Economic Research (NBER) based on several data points
• The technical, emotional, and social impacts of recessions are different conversations that can be measured many ways and are painful for significant portions of the real economy

Introduction

One headline in the financial news cycle that is almost guaranteed to get clicks looks something like: “Prominent Economist sees Recession Coming Based on These Three Signals.” Given the diversity and size of the U.S. economy, there is always data available that can be used to argue either side of the economic health debate. There is a widely cited rule of thumb that two consecutive quarters of declining real GDP constitutes a recession. This can be a useful definition in the same way that a sore throat indicates an illness, but there is a range of outcomes from a mild cold to something more serious. Negative GDP growth readings can be a telling symptom of wider issues in the economy. The full picture requires data points beyond just GDP and some knowledge of more acronyms like NBER (National Bureau of Economic Research) and BCDC (Business Cycle Dating Committee). We will attempt to lay out some of the processes and metrics used to determine recessions to save the reader from some research, although like most areas of finance and economics there is a level of subjectivity to officially calling a recession. There are also any number of “alternative” recession indicators covering trends in pizza purchases to men’s underwear sales that range from amusing to slightly informative about the current state of the economy.  

NBER and the BCDC 

Most everyone has had some exposure to the business cycle, represented visually by a wave pattern (Exhibit 1) where the economy expands to a peak and contracts to a trough over time. The time from peak to trough is considered a recession. But who determines a peak and a trough? What metrics determine the direction and magnitude of economy-wide cycles? The National Bureau of Economic Research (NBER) is a nonprofit founded in 1920 by, somewhat shockingly, a communications executive and a pro-labor socialist who predictably disagreed on policy but identified a need for reliable data and information to discuss economic issues. It’s important to note that NBER has remained steadfast in their mission to present research and data without making policy recommendations. NBER is funded through grants and charitable contributions and is led by an impressive list of academics and business professionals.

The Business Cycle Dating Committee (BCDC) consists of macroeconomic and business cycle experts appointed by the president of NBER, whose basic purpose is to monitor, identify, and maintain a chronology of economic cycles. The BCDC identifies recessions as a part of this process by documenting the month of each peak and trough throughout the business cycle. In an economy as large and diverse as the United States, the tricky part is measuring and determining turning points accurately and as objectively as possible. 

Download the full report HERE where we discuss:

• How Do We Know We’re in a Recession? 
• Feeling Out a Recession

Sources

1. St. Louis Fed; https://www.stlouisfed.org/publications/page-one-economics/2023/03/01/all-about-the-business-cycle-where-do-recessionscome-from?edu-embed=1
2. Ibid
3. NBER; https://www.nber.org/research/business-cycle-dating/business-cycle-dating-procedure-frequently-asked-questions
4. Berkely Business Review; https://businessreview.studentorg.berkeley.edu/economic-indicators-lipstick-and-underwear/
5. Morningstar; https://www.morningstar.com/business/insights/blog/markets/leading-recession-indicators
6. NPR; https://www.npr.org/transcripts/1252663619
7. https://www.tker.co/p/stock-market-history-with-recessions