Glint’s Helpful Hint: What is a recession?

Economists like to joke that a recession is when your neighbour loses their job but a depression is when you lose your job. We all know that a recession is bad, but why exactly?

A recession refers to a significant downturn in economic activity – we all get poorer – and is frequently defined as two successive quarters of decline in gross domestic product (GDP). GDP is the monetary measure of the value of all the goods and services (e.g. washing machines, accountancy work) produced and sold in a country.

The idea that two consecutive quarters of falling GDP indicate a recession derives from the US economist Julius Shishkin, who in 1974 (when he was head of the US Bureau of Labor Statistics) wrote in the New York Times a list of rules that would indicate a recession. Over the years most of Shishkin’s suggestions have dropped away, apart from the ‘two successive quarters’ rule.

This ‘rule’ has since been adopted universally but in fact it’s not a perfect guide. In 2001 there was a recession, with the loss in the US of 2.7 million jobs, more job losses than in any previous post-1945 recession. Yet until July 2002, data showed just one down quarter of GDP, leading policymakers to claim there had been no recession. Yet later that month, revisions showed GDP down for three straight quarters. Time-lags can skew data.

It’s probably safer to include other factors, such as output, employment, income and sales, in any judgement about a recession.

So a more accurate definition turns out to be more complicated; a recession is a self-reinforcing downturn in economic activity, when a drop in spending leads to cutbacks in production and jobs, triggering a loss of income that spreads across the country and from industry to industry, hurting sales and in turn feeding back into a further drop in production. A vicious cycle. A pronounced, pervasive and persistent downturn in the broad measures of those factors is a more reliable indicator of a recession.

Since 1948, there have been 11 recessions in the US – about one every six years. The UK is reckoned to have had eight recessions since 1956; that of 2008 saw five quarters of economic contraction. The UK is already in recession, according to the ‘two quarters’ rule; The Economist magazine has recently said a global recession is “inevitable” in 2023.