What is a Recession?

What is __

The word “recession” has gained a lot of attention recently due to the disaster that is our current economy. Things are more expensive than ever, and that is obvious. Inflation is through the roof, and people are feeling the pinch. However, are we really in a “recession?”

According to the Biden Administration, the answer is no, we’re not. Earlier in July, the White House released a statement saying, “While some maintain that two consecutive quarters of falling real GDP constitute recession, that is neither the official definition nor the way economists evaluate the state of the business cycle.”

Mainstream media and politicians have been referring to the current economic state as a “transition” which, a recession is a type of transition. It’s basically a shorter form of a depression. Recessions are measured in months while depressions are measured in years.

Many on the left are clapping their hands and going along with whatever the government tells them. Many on the right are shaking their head and saying the government is redefining the word. Many more still, have no real idea as to what a recession is or why it’s important, and that’s a problem because when we don’t know what a word means, we can be told it’s anything without having any reason to believe differently. So, what is a “recession?”

The Basics

At the most basic level, it’s a period of reduced economic activity. Most will say it happens in two consecutive quarters, though some may say three. In these quarters, the real gross domestic product (GDP) is looked at to determine if there’s a recession. The GDP is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As of this publication, the U.S. has seen two quarters where there has been a decrease in GDP. In the first quarter, the U.S. saw a decrease in GDP by 1.6 percent. We followed this in the second quarter with a 0.9 percent decrease from the first quarter. Furthermore, according to an article published by the Foundation for Economic Education, “Federal statutes, the Congressional Budget Office, and other governing bodies use the two consecutive quarters of negative growth as an official indication of economic recession.”

The article also stated that historically, recessions are commonly defined as an “economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.”

So, this seems pretty straight forward. However, like so many other terms, Democrats have really worked to muddy the waters on the definition.

“There is an organization called the National Bureau of Economic Research that looks at a broad range of data in deciding whether or not there is a recession,” Treasury Secretary Janet Yellen said. “And most of the data that they look at right now continues to be strong. I would be amazed if they would declare this period to be a recession, even if it happens to have two quarters of negative growth.”

Yellen went on to say that we can’t be in a recession because of the creation of “almost 400,000 jobs a month.” And, in her defense, the NBER does look at a broad range of data before deciding we’re in a recession. However, this doesn’t discredit the most basic definition of a recession as being a shrinking economy in two consecutive quarters, especially since other governing bodies do use that as the formal definition.

As economic and political historian Phil Magness explained in a tweet,

“NBER has a sound approach for studying recessions - a determination they often do not make for months or even years after the fact. But there’s nothing establishing them as the “official” arbiter.

“Quite the contrary: most federal statutes use a 2-consecutive quarter standard.”

Screenshot of tweet by Phil Magness

Recessions throughout U.S. History

Astonishingly enough, recessions are more common than we might think. In fact, the U.S. has spent 29.8 percent of its time in a recession between 1871 and 2010. Since the founding of the U.S. all the way up to 2020, we have seen 48 recessions in our country’s history. The first recession the U.S. ever saw was in 1785, appropriately titled, the Panic of 1785. This was a four-year long recession caused by post-war deflation, an abundance of accrued debt, and overexpansion. Of the 48 recessions, 22 of them occurred in the 1800s including the 1815-1821 Depression (considered the first “boom-bust” period in America’s financial history), and the Panic of 1873 and the Long Depression which lasted six years and was originally known as the Great Depression before the more notorious depression of the 1920s and 1930s. The 1900s saw a total of 20 recessions including the notorious Great Depression that started with the Stock Market Crash of 1929. The unemployment rate rose to a peak 24.9 percent in 1933 and though it lasted less than four years officially, thanks to President Franklin D. Roosevelt and his New Deal, the economy couldn’t fully recover until after World War II.

With the total number of recessions the U.S. saw in the 1900s, it averages out to one every five years. For the 1800s, the U.S. saw an average of one recession about every 4.5 years. We here in the 21st century have already seen more than a fifth of the century go by, and yet have only seen three—the 2001 recession, The Great Recession of 2007-2009, and our shortest ever, the 2020 COVID-19 contraction, which lasted two months.

Looking back at recessions from the past two centuries compared to our current century, it seems as though we have lived a life of ease and abundance. Recessions nearly seemed to be a normalcy to early American life, and this is not something that we have really had to deal with all that often in the 2000s. At least for this reason, we are lucky to be living in the time that we are. However, is our luck about to run out? Looking back at earlier recessions, some of the biggest causes for these hard times that I found were government trying to fight inflation and war. Two things modern day Americans are no strangers to.

Conclusion

When all has been said and done, how important is it to know that we’re in a recession? The reality is that the average person doesn’t need macroeconomics to know things are going poorly. It is like sticking our hand under the water of a shower. We will know if it’s hot or cold because we will feel it. Knowing about national income data really best helps the government. Politicians and bureaucrats don’t understand the market like average citizens do.

As American Economist Murray Rothbard stated,

“They are decidedly outside the market. Therefore, in order to get "into" the situation that they are trying to plan and reform, they must obtain knowledge that is not personal, day-to-day experience; the only form that such knowledge can take is statistics.

“Statistics are the eyes and ears of the bureaucrat, the politician, the socialistic reformer. Only by statistics can they know, or at least have any idea about, what is going on in the economy.”

So, we are in a recession, and how long it will last will depend on what the government decides to do next. Though the Biden White House may try to redefine a recession and mainstream media will refuse to say the word, it is here, and average Americans feel it.