What does ‘recession’ even mean anymore?

Type “definition of” into your Google search field and see what autocomplete prompts you get. Your algorithm may vary, but when we did it just now, “narcissist” was high on the list and “insanity” was even higher. But the top prompt was “recession”. Yet so many of us throw around this term without knowing what it means.

The broadest definition might be the most widely accepted but at the expense of being the least useful: “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” That’s courtesy of the National Bureau of Economic Research, the Cambridge, Mass., charm school for Nobel laureates which was founded more than a century ago to study business cycles. Since the 1960s, the NBER has been the arbiter of when American recessions start and end.

So good for you, professors, but how do we know when we’re in one?

Rules aren’t laws

The rule of thumb has always been: Two consecutive quarters of negative growth in gross domestic product constitute a recession. It’s been so ingrained that we had to go back to our college Economics textbook – some of us just can’t throw anything out – and were surprised to read that, even back then, the two-quarters rule was unofficial guidance.

Well, not everywhere. The United Kingdom adheres to the two-quarters rule in determining its recession dates. Other countries have their own sets of metrics.

This raises another question: How do we determine if the whole world is in a recession? That’s the job of the International Monetary Fund. The IMF used to define a global recession as a period in which the world’s aggregate GDP grows at a rate of less than 3% per year. (Three percent is a pretty good year for developed countries but is considered slow growth for nations that are still industrializing.) But the Fund changed that definition to a less quantitative one. As a result, the global recessions of 1998 and of 2001-2002 disappeared.

And yet, while the IMF is making recessions go away, the NBER appears to have invented one. The think tank appears to be using more art than science since declaring the single-quarter Covid-19 recession in 2020. It now says that contractions in income, employment, industrial production and wholesale or retail sales are taken into account along with contractions in GDP.

Are we or aren’t we, and does it matter?

There are smart people who disagree on the question: Are we in a recession right now?

We’ve had two – mildly – contractionary quarters in a row. So, the two-quarter rule – barely – applies. It really is a judgment call at this point.

“Most of the data [the NBER is looking] at right now continues to be strong,” Treasury Secretary Janet Yellin, a former Federal Reserve chair, told NBC News’s Chuck Todd. “I would be amazed if they would declare this period to be a recession, even if it happens to have two quarters of negative growth. We have a very strong labor market. When you are creating almost 400,000 jobs a month, that is not a recession.”

But there are troubling signs. The yield curve is inverted; that is, you can get a higher interest rate on a two-year note than on a 10-year bond. That means investors are incentivized to shorten their time horizons and go for fast bucks rather than long-term value. While it is a signal for a potential recession, an inverted yield curve is not always followed by one.

Still, not all sectors in the economy are doing equally well.

“I think we’re in a housing recession right now,” Robert Dietz, chief economist at the National Association of Home Builders, told Politico. “After a year and a half of post-Covid housing strength, this isn’t just a retrenchment to a more normalized trend — this is definitely a weakening.”

The Politico article notes that the housing market cooled since the stimulus supports ended. Meantime, mortgage rates nearly doubled in the first half of the year. Housing starts and builder confidence are plunging. The Great Recession started with collapsing real estate prices, so there’s every reason to believe that could happen again.

What next?

The consensus among financial professionals is that the NBER … doesn’t matter. Who cares if some Harvard and MIT economists call our current state a mild recession, a contraction, a cyclical pause, a soft landing or make up a whole new term for a whole new phenomenon?

“Should I dump my tech stocks and buy dividend-paying value stocks?”

“Should I take my money out of equities altogether and put it all in fixed income?”

“Am I going to get laid off?”

These are the important questions. And you might want to talk to your financial advisor to determine how to best insulate your portfolio from the worst effects.

Still, there is less difference between a mild recession and a mild expansion than there is between a mild recession and a depression. “Depression” is another one of those ill-defined terms, although Ronald Reagan got in the last word on that:

“Recession is when a neighbor loses his job,” the Great Communicator said during his 1980 campaign. “Depression is when you lose yours.”