The US Recession is Officially Over

Today, the group officially responsible for applying dates to national business cycle turning points (i.e., recessions and recoveries), the National Bureau of Economic Research (NBER), declared that the most recent recession ended in June of 2009. Read their full statement.

Just as most people didn't realize we were in recession for quite some time after the most recent recession began, many didn't realize that we have now been in an economic recovery for over a year. There are several reasons for this.

First, a (national) recession is not defined the way most people think it is. Apparently almost everyone believes that a recession occurs when the US economy experiences at least two consecutive quarters where real (inflation-adjusted) GDP declines. This definition is predicated entirely on the behavior of a single variable -- national output, which would be declining for at least six consecutive months. Were this the definition, it would be very easy to "date" recessions: count to two after checking GDP releases, looking for negative growth rates. Second, the NBER does not do things this way, nor do they restrict their analysis exclusively to quarterly data. Read the Q&A about the way they define recessions and recoveries. In this, the NBER states a very important point: a recession isn't defined as being a period of low activity, but a time period of continually declining economic activity. Extending this to recoveries, these don't necessarily indicate a return to "normal" times. Instead, they reflect continually improving economic activity in a number of areas.

What is the actual definition the NBER uses to define a recession? According to the NBER, a recession is defined in the following way:

"The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

So, from this, what we can infer is that as we are now about a year into a national economic recovery, economic activity in a number of areas is improving (on average). THIS DOES NOT MEAN WE HAVE RETURNED TO "TRADITIONAL" LEVELS OF THESE VARIABLES. That could take months or even years, especially as our economy is in a period where persons are saving and paying down debt, and bank lending is not as great as we would like to see it.

Confusion surrounding the dates of recessions and recoveries is the manifestation of a very basic observation I will make: persons instinctively focus on the levels of economic variables; economists extend this focus on levels to rates of change as well. So, the rate of economic growth is just that -- a rate of growth and thus a measure of rate of change. Actually, economists often go farther, as we are now concerned about whether the rate of economic growth will be slowing. This means economists are now focusing on rates of change (are we slowing?) in the rate of change (the rate of economic growth). You will often hear this referred to as the "second derivative" of economic activity. Clearly, economists think and speak a different language than do most people, often defying "intuition."