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The United States has now had two consecutive quarters of negative growth. This, in turn, has sparked a debate over what constitutes a recession. Wikipedia has this

In economics, a recession is a business cycle contraction when there is a general decline in economic activity.

And notes

There is no global consensus on the definition of a recession. In the United States, it is defined as "a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales". In the United Kingdom and other countries, it is defined as a negative economic growth for two consecutive quarters.

The Biden Administration (including Fed Secretary Janet Yellen) has reiterated that as well

The National Bureau of Economic Research (NBER) Business Cycle Dating Committee—the official recession scorekeeper—defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The variables the committee typically tracks include real personal income minus government transfers, employment, various forms of real consumer spending, and industrial production. Notably, there are no fixed rules or thresholds that trigger a determination of decline, although the committee does note that in recent decades, they have given more weight to real personal income less transfers and payroll employment.

The problem, for some people, with this definition is that it's too indefinite. NBER, for instance, took until Dec 2008 to identify the US was in a recession that started sometime back in Jan 2008 (about 11 months).

The committee identified December 2007 as the peak month, after determining that the subsequent decline in economic activity was large enough to qualify as a recession.

It's clear the US has no objective standards for defining a recession as it is happening. Yet some countries take the raw GDP quarters and run with it

In the UK, a recession is defined as a negative economic growth for two consecutive quarters.

Why doesn't the US subscribe to the "two negative quarters of growth" standard?

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    If (as Wiki notes) there is no global concensus on the definition, then how is the arbitrary measure chosen by the UK a standard? In fact, there needs to be an argument of why to use the UK's arbitrary measure, not the other way around.
    – uberhaxed
    Jul 28, 2022 at 18:45
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    @uberhaxed I fully expect part of the problem here to be which side happens to be in power at the time.
    – Machavity
    Jul 28, 2022 at 19:41
  • That link gives a lot of context and you should note in the question that a lot of US politicians do use this measure.
    – uberhaxed
    Jul 28, 2022 at 19:49
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    It should be emphasized that NBER quite intentionally does not attempt to "call" recessions in real time. They want to be right, not fast. The goal is to provide a high-level analysis of historical economic data to better inform future economic policy, not to act as a real-time advisor to the US government about the present state of the economy.
    – Kevin
    Jul 30, 2022 at 2:54

2 Answers 2

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For what's worth it, NBER clearly likes to have some flexibility in when to declare a recession, e.g. they also say

The committee's view is that while each of the three criteria—depth, diffusion, and duration—needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another. For example, in the case of the February 2020 peak in economic activity, we concluded that the drop in activity had been so great and so widely diffused throughout the economy that the downturn should be classified as a recession even if it proved to be quite brief. The committee subsequently determined that the trough occurred two months after the peak, in April 2020.

By the way, NBER is not even a government organization. I suppose the question behind the question is why the US government refers to NBER on such issues.

A WaPo article notes that the NBER committee's decision often are lagging behind the events... by design.

The committee typically waits long after a recession has begun to declare it, only acting when the evidence has become overwhelming, sometimes even after the recession is already over. That puts the pressure bearing down on the organization from the outside — to promptly render a verdict on one of the most important matters facing economic policymakers — directly at odds with its mission to provide unassailable empirical decisions.

As a result, what seems like a straightforward question — is the U.S. economy in a recession? — is in part decided on a subjective basis at a later date, sometimes when it no longer appears pertinent, by experts in closed-door meetings of a privately selected committee.

“By far, the most important thing to try to convey is that the committee is not trying to do real-time dating of whether we’re in a recession,” said MIT economics professor James Poterba, the NBER president and a member of the committee, in an interview. “There’s often enormous amount of interest in that question and what many people are hoping for, but the committee’s task is to create a consistent historical record of the turning points — the peaks and the troughs in the U.S. economy.” [...]

Its last public pronouncement came on July 19, 2021 — when the committee declared that there had been a recession between February and April 2020, the shortest one in U.S. history.

Given this kind of lag, clearly US government entities who need to "do something" during a recession probably aren't waiting for NBER's official announcement, but conduct their own evaluations. (TBH, even the IMF makes such pronouncements much quicker; see e.g. their April 2020 warnings etc.)


I don't want to ge too much into why WH claims the US is not [yet] in a recession (as its the not the [main] topic of this Q), but when it comes to more "real time" evaluations, the WH for instance says among other things that the Sahm rule which uses 3-month employment changes as the only proxy, hasn't yet been triggered in 2022. The IMF said in June that it expects the US to "narrowly avoid a recession" for 2022-23, although, the IGM survey of economists suggests otherwise for 2023. The aforementioned IMF page says it would be a "tricky task" to "expeditiously slow wage and price growth without precipitating a recession". And on a (2020) blog some other IMF economists explain why that's the case:

For example, a steep increase in oil prices can be a harbinger of a recession. As energy becomes expensive, it pushes up the overall price level, leading to a decline in aggregate demand. A recession can also be triggered by a country’s decision to reduce inflation by employing contractionary monetary or fiscal policies. When used excessively, such policies can lead to a decline in demand for goods and services, eventually resulting in a recession.

And more generally

They typically last about a year and often result in a significant output cost. In particular, a recession is usually associated with a decline of 2 percent in GDP. [...] The unemployment rate almost always jumps [up] and inflation falls slightly [...]

Likewise, according to S&P "If employment starts to slide, a recession is almost inevitable" in the present US circumstances.


By the way, the def Wikipedia gives for the UK is fairly standard in the EU (as well); Eurostat uses it without any further discussion as to alternatives (although it does say "normally defined"). They do mention a whole bunch of EC regs in the end of that paper as the basis for data and terminology, so I would not be surprised that recession is actually defined in one of those EU regs. Wikipedia also confuses EABCN (which is a CEPR initiative, itself a London-based non-profit) for an official EU institution, which it is not (unlike Eurostat)! EABCN appears to be an attempt to create a NBER-like Cycles committee in Europe (or at least in London). On the other hand EABCN includes among its members representatives of all the major European banks from the BOE to the ECB (but also those of Switzerland and South Africa), so it might have some quasi-official status, although I'm rather unsure of it.

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    Is the question behind the question why the government refers to a committee of independent world class economists instead of political groups? Really?
    – uberhaxed
    Jul 28, 2022 at 18:59
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    @uberhaxed: I'm not doubting their expertise, it's just that in other countries such decision are usually made by some committee under the government's aegis. Even the Q here refers to NBER as "the official recession scorekeeper". Dunno if there's a US law that stipulates that, or why it was decided to "outsource" such matters to a private org. Jul 28, 2022 at 19:11
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    I doubt there is a law, but I think the reason is political rather than legal. Since Americans mostly vote based on the economy, a governing body will be reluctant to give a negative forecast in an election year, while an independent body will not. This is also likely why the president conveniently defers to their decision (it's an election year): the NBER usually waits a long time to declare a recession in retrospect. Officially they say it's so they have all the data, but it's likely because the expectation that you're in a recession can artificially extend it or make it worse.
    – uberhaxed
    Jul 28, 2022 at 19:18
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    Why is it so important to have a definite threshold for "recession" anyway? The economic situation is what it is regardless of how you label it.
    – phoog
    Jul 28, 2022 at 20:53
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    @phoog: well, that's a different question. People like to name things. Politicians even more so, I suppose, esp. in the age of Twitter. Jul 28, 2022 at 21:30
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Why doesn't the US subscribe to the "two negative quarters of growth" standard?

Let me answer this first providing some context that I believe will help understand the main question and then the question itself.

Context

First, let me start by mentioning very important context for this question. The "two negative quarters of growth" is actually not generally accepted standard for defining a recession. It is correct to say it is the common definition but it is far from only or a standard definition used in economics (see Blanchard et al Macroeconomics: A European Perspective pp 572).

In fact in economics there is general consensus that using two negative quarters of growth is actually a bad definition of recession, rather it is commonly used because it is very practical and has very little room for subjectivity. First, the current GDP data are just estimates that will not be fully settled before at least 5 years will pass when we get the actual GDP measures after all revisions. Second, recessions are not a uni-dimensional. For example, there is small drop in GDP over 2 quarters (e.g. -0.01%) and labor markets are booming many economists would not consider it recession. Recession is decline in economic activity, and while GDP is the most comprehensive measure of economic activity it is far from the only measure of economic activity.

As a consequence, large number of research papers (even outside US) actually relies on NBER-like definitions of recession. For example, IMF an international organization, also has NBER-like definition of recession that uses various indicators (see IMF). Hence, saying that 2 quarters of negative GDP growth is standard is at least a bit misleading. This would be akin to saying standard human language is English because when we include not just native but also non-native speakers it is the most spoken language on earth, with estimated 1,132 million speakers according to Berlitz, ignoring that the second most spoken language Chinese is right there behind English with estimated 1,117 million speakers.

Main Answer

To understand why US uses the NBER definition we have to go through short history of recession dating.

In mid 20'th century recession dating was a bit of a wild west, as there were no generally accepted definition. The two quarters of negative GDP growth come from article by Julius Shiskin in The New York Times in 1974. The article provided whole list of various recession indicators, the two quarters of negative GDP growth was just one of many and it was always intended to be a rule of thumb, not a hard rule. Over years this rule of thumb became quite popular while other rules of thumb he advocated were forgotten.

The NBER business cycle dating has actually more richer tradition. The first time NBER dated business cycles in the US was in 1929, although at the time it was not official definition. The first time we can consider NBER definition to be official/quasi-official was in 1961 when US Department of Commerce launched the monthly Business Cycle Developments publication that was using NBER definition, even though this was done without explicit endorsement (See NBER).

The NBER business cycle committee was set up in 1978. This was just 4 years after Shiskin published his influential article and at that time the two quarters of negative GDP growth was not as popular as it became later. The NBER members must have been aware of Shiskin's article (he was quite famous business/economic statistician, working as chief statistician for Census Bureau), yet they decided not to use his rule of thumbs (although they were perhaps somewhat inspired by his article since the other Shiskin's rules of thumb also talk about diverse set of indicators).

This was likely because the NBER economists must have also been aware of all the methodological problems the two quarter rule has. As already previously motioned the two quarter rule has some significant drawbacks. According to Klaus & Wolfgang 2008 the main

disadvantage of the Shiskin rule is that the rate of change of the seasonally and calendar adjusted GDP go through erratic fluctuations due to subsequent data revisions, whereby a minus can easily become a plus.

This can easily lead to wrong identification of recessions. More complex multi-dimensional rules such as the NBER one can be more precise because they consider numerous factors (e.g. accurate employment figures are usually faster than GDP ones). Indeed, the NBER measure of recession has been generally vindicated by more complex recession dating algorithms (e.g. see Leamer 2008).

The only significant flaw of the NBER dating procedure is that indeed it is a bit (but not completely) subjective. However, NBER dating committee consist of top economists that have their reputation at a stake. Also, while currently (at least from what I can see as European observer) US society and academia seem to be highly politically polarized it did not used to be so. Today people might perhaps reasonably worry about White House putting political pressure on NBER, but I do not think such thing would be thinkable even 5 years ago. After all NBER is calling recessions in the US already for over half of a century, yet their definition became controversial only now in 2022.

Summary

Hence the reason why US does not use the "two negative quarters of growth" definition are as follows:

  1. NBER was already quasi-official arbiter of recessions in the USA ever since 1961. Hence NBER system has longer tradition in the US (even though the NBER definition slightly evolved since).
  2. NBER definition is considered to be (at least from academic perspective), methodologically superior definition of recession despite of being more subjective. Hence there is rational argument to be made for continuing to prefer this measure over less sophisticated (albeit more objective) rules of thumb.
  3. The NBER committee consists of top US macroeconomists. Such people have reputations at stake. Historically, heck even 5 years ago, before current US political polarization of society, it would be unthinkable to accuse such a distinguished group of academics of political bias.

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