What Is a Recession?

• Author: Stijn Claessens/M. Ayhan Kose
• Position: Assistant Director/Senior Economist in the IMF's Research Department
• Pages: 52-53

Page 52

For more than a year, barely a day has passed that we have not heard dire economic news about the United States, Europe, or Japan. Unemployment has been rising, company profi ts have been falling, fi nancial markets have been tumbling, and the housing sector has been collapsing. Is there a single word to describe these developments? Yes: "recession."

The ongoing global financial crisis has been accompanied by recessions in many countries. This pattern is consistent with the historical record. Synchronized recessions have occurred in advanced economies several times in the past four decades-the mid-70s, early 80s, early 90s, and early 2000s. Because the United States is the world's largest economy and has strong trade and financial linkages with many other economies, most of these globally synchronized recession episodes also coincide with U.S. recessions.

Although U.S. recessions have become milder over time, the current recession is likely to change this trend. Already 16 months old-with sharp declines in consumption and investment-it could become one of the longest and deepest recessions since the Great Depression of the 1930s.

Calling a recession

There is no offi cial defi nition of recession, but there is general recognition that the term refers to a period of decline in economic activity. Very short periods of decline are not considered recessions. Most commentators and analysts use, as a practical defi nition of recession, two consecutive quarters of decline in a country's real (inflation adjusted) gross domestic product (GDP)-the value of all goods and services a country produces (see "Back to Basics," F&D, December 2008). Although this defi nition is a useful rule of thumb, it has drawbacks. A focus on GDP alone is narrow, and it is often better to consider a wider set of measures of economic activity to determine whether a country is indeed suffering a recession. Using other indicators can also provide a more timely gauge of the state of the economy.

The National Bureau of Economic Research (NBER), a private research organization, which maintains a chronology of the beginning and ending dates of U.S. recessions, uses a broader definition and considers a number of measures of activity to decide the dates of recessions. The NBER's Business Cycle Dating Committee defines a recession as "a...