Recession Definition and GDP

Craigl14, one of our regular contributors to our discussion forums first posted this commentary here. I've edited it to honor his excellent contribution with an article.

craigl14 - FOLLOW UP TO GDP by Qtr

I hope I am not boring anyone or beating a dead horse, but I wanted to add a few comments to my earlier post in hopes of providing some clarity to the economic weakness experienced in the early-2000s. This, of course, is my interpretation only and I do not hold myself out as an expert on the subject, just someone who has done a bit of research over time, mainly due to the importance of the onset of recessions and preceding stock market activity. I think the economic weakness can be looked at in three ways:

1. actual real GDP data,
2. NBER designation and
3. coincident indices.

Using real GDP data, there was no "textbook" recession, defined as two consecutive quarters of negative real GDP growth. However, I think some caveats are in order. As I mentioned in an earlier post, the NBER determined there was a recession from March through November 2001. The quarter to quarter real GDP annualized growth rates for the four quarters of 2001 were -0.5%, 1.2%, -1.4% and 1.6% respectively. Prior to this period, 2Q00 was 6.3%, 3Q00 was -0.5% and 4Q00 was 2.1%. Subsequent to 2001, annualized growth rates were: 2.7%, 2.2%, 2.4%, 0.2% respectively for the four quarters of 2002; and 1.2% and 3.4% respectively for the first two quarters of 2003. As anyone can tell, economic growth was anemic from the third quarter of 2000 through the first quarter of 2003. As is widely recognized, long-term trend growth of real GDP is about 3%. Further, potential real GDP growth as put forth by Brinker, Kasriel and others is also around 3% (the sum of labor force/population growth and productivity growth, the basis for which I am not familiar with). Thus, the economy was "below-trend" or "below-potential" for 11 consecutive quarters. Some might suggest another important threshold is 2%, which I believe was dubbed the economy's "stall speed" by Roach, and perhaps others. It's been awhile, but I believe his takeaway on this point was that once the economy falls below its stall speed, it is basically indifferent from a recession because it "feels like" a recession. By this measure, the economy "stalled" for seven of the 11 quarters from 3Q00 through 1Q03.

Without going into too much detail on the NBER's "official" recession designation, let me just say that the NBER looks at more than real GDP growth. In fact, this exact question is addressed in a document available on their website in the form of FAQs:

• "Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?
• A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. According to current data for 2001 [as of October 2003], the present recession falls into the general pattern, with three consecutive quarters of decline. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, 'a significant decline in economic activity.' Second, we use a broader array of indicators than just real GDP [including personal income, employment, industrial production and manufacturing/trade sales]. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology."

(I am) not sure where they get the three quarters of decline unless it was in old data that has since been revised. There were three non-consecutive quarters of decline in real GDP in 3Q00, 1Q01 and 3Q01.

Finally, eyeballing charts of coincident indices put out by a couple of sources, it looks like the expansion peaked sometime in mid- to late-2000, contracted through the end of 2001, rebounded slightly through mid- to late-2002, then slipped again through early- to mid-2003, at which time the subsequent expansion began. This roughly corresponds to the general weakness as evident in the real GDP data pointed out above.

I do not purport that this is the final word on this subject, I just wanted to expand on some thoughts I made earlier after having some time to do a little investigating. (I) hope some find this interesting.

-- posted by craigl14

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Kirk Lindstrom: Answers & my words are general in nature, are not meant as specific investment advice, and do not necessarily represent the opinion of anyone but Kirk. Individuals should consult with their own advisors for specific investment advice.

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