What is a recession and how can it be measured?
Written by Patty Silverstein, chief economist for the Metro Denver EDC, this section identifies major issues affecting the economy and answers frequently asked questions.
All over the news, reporters, politicians, and economists keep mentioning the dreaded “R-word”: recession. No one ever wants to hear the word, but recessionary periods are just a normal part of the business cycle. What is a recession? How do we know if we are in a recession? This article presents different ways to define recessions and how to measure them both in Colorado and the U.S.
Q: What is a recession?
Over the years, many definitions have been offered for a recession. One of the most common definitions is two consecutive quarters of negative growth in a country’s gross domestic product (GDP), which is the broadest measure of the value of goods and services produced by a country’s labor and property. Surprisingly enough, this definition was not put forward by the U.S. Department of Labor, the Federal Reserve, or any government entity. The idea first came from a 1974 article in the New York Times by Julius Shiskin. (1) The article included a large list of recession indicators but the only one that gained prominence was the two quarters of GDP decline.
With the complex nature of today’s global marketplace, many factors influence the health of an economy. Indeed, not all periods commonly viewed as recessions in the U.S. would qualify under the limiting GDP definition. Instead, our current standard for measuring economic cycles comes from the National Bureau of Economic Research (NBER) which defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.” (2)
A recession cannot be measured by looking at one point in time. Rather, economic health is best measured by examining trends. Economic recessions begin when a region has passed the peak of its economic cycle and growth rates decline. Only when the trend switches directions and various indicators change in a positive manner is the economy considered to be in recovery. Recovery usually lasts until the indicators have reached or exceeded the levels of the previous peak.
The NBER was founded in 1920 and has tracked 32 economic cycles since 1854. (3) Throughout this time, periods of economic contraction (where indicators experienced negative trends) have lasted an average of 17 months. The most recent national contractions/recessions have been shorter than average, with the 1990-1991 and 2001 recessions both lasting eight months. According to the NBER, this most recent economic cycle peaked in December 2007 and has not reached its trough yet, making it the longest lasting recession since the 1980s thus far.
Q: How are recessions measured in Colorado?
There is no official definition of a state recession, but many indicators can be used to measure the health of Colorado’s economy. Some measures of economic health at a state level include state gross domestic product, unemployment rates, retail sales personal income, and new housing permits. The challenge of indicators such as these is timing. Unlike the U.S., Colorado does not have access to as many timely economic indicators. For example, state gross domestic product is only available on an annual basis with a six-month lag, making it an impractical measure of Colorado’s current economic status. Other indicators, such as the unemployment rate, are lagging indicators that do not give a full picture of the economy. The best and most timely measure of economic vitality at a state level is the change in employment. State employment levels are available monthly and released with a one-month lag. When looking at the change in employment by month from one year to the next (often called “over-the-year” growth rate), an accurate measure of the economic position of the state begins to emerge.
Based on not seasonally adjusted data from the U.S. Bureau of Labor Statistics’ Current Employment Statistics program, Colorado experienced its first downward trend in over-the-year employment growth in late 2007. In 2008, every month had a continued decline in over-the-year employment growth save for January and July, indicating a softening of the Colorado economy. However, the state did not experience over-the-year employment losses until November. In contrast, national over-the-year employment growth began to contract in the middle of 2007 and reached negative positions in June 2008. Colorado’s current downturn is expected to be shallower and shorter than that of the nation.
Q: What tactics are being used to soften the effects of the current recession?
Governmental entities at the federal, state, and local levels are working on plans to stimulate the economy to help lessen the effects of the recession. Denver Mayor John Hickenlooper recently announced plans to advance the timeline of several voter-approved infrastructure projects with an estimated economic impact of $200 million each year over the next several years. (4) Colorado Governor Bill Ritter introduced an economic stimulus package to give an income tax credit to companies that add at least 20 jobs and would improve loan access for expanding businesses. (5) In addition, the legislation would increase worker training and development incentives in the renewable energy industry. The Colorado Legislature says that job creation and the economy are their top priorities. However, with an estimated budget shortfall in 2009, recovery plans could be limited because of Colorado’s constitutional ban on deficit spending.
At a national level, the $700 billion Troubled Assets Relief Program (TARP) is targeted at assisting home foreclosures, financial institutions, consumer lending, and auto companies. The specifics of this plan continue to evolve as financial conditions change and market circumstances unfold. President Barack Obama recently introduced an economic stimulus plan that includes tax cuts and infrastructure spending. The plan calls for the largest infrastructure development program since the construction of the nation’s interstate highways in the 1950s. (6) The package is estimated to cost more than $800 billion including upgrading technology, improving energy efficiency, and building and repairing roads, bridges, utilities, and schools. The plan as a whole could generate as many as four million jobs and cause the U.S. GDP to increase by an estimated 3.7 percent by the end of 2010. (7)
Because of these efforts, Colorado is expected to start its recovery by the third or fourth quarter of 2009. This year marks only the seventh year of annual job losses for the state since 1940. Recessions are painful, but necessary periods of economic change. Our challenge is to emerge as a stronger, more innovative state, ready to meet the opportunities of the next decade.
- Achuthan, Lakshman and Anirvan Banerji, “The risk of redefining recession,” CNNMoney.com, May 7, 2008.
- National Bureau of Economic Research, “Determination of the December 2007 Peak in Economic Activity,” http://www.nber.org/cycles/dec2008.html, December 11, 2008.
- National Bureau of Economic Research, “Business Cycle Expansions and Contractions,” http://www.nber.org/cycles.html.
- Ingold, John, “Quickly building local stimulus,” The Denver Post, http://www.denverpost.com/ci_11201169?source=bb, December 12, 2008.
- Office of Governor Bill Ritter, Jr., “2009 Economic Proposal Announced,” http://www.colorado.gov/cs/Satellite/GovRitter/GOVR/1229603081432, December 18, 2008.
- Shear, Michael D., “Obama Offers First Look at Massive Plan to Create Jobs,” The Washington Post, http://www.washingtonpost.com/wp-dyn/content/article/2008/12/06/AR2008120602187.html?hpid=topnews, December 7, 2008.
- Goldman, Julianna, “Obama Says Stimulus Package Creates 4 Million Jobs,” Bloomberg.com, January 10, 2009.