What is a Recession?

Understanding an Economic Recession

There isn't a real definition for an economic recession. President Clinton used a standard guideline which states that an economic recession is 2 or more quarters of negative economic growth.

That sounds reasonable. Is it?

Not exactly.

Growth is an interesting phenomenon. Suppose a child grows an average of 3” per year. I realize anyone with kids knows this is crap, but, lets just pretend. If a child does not grow the 3” is there something wrong? Yep.

With kids these are called developmental disorders or failure to thrive. Children are supposed to grow so much at each stage of their development. When kids don't achieve milestones we go to doctors and discover problems. I won't go too much into that except as a metaphor.

So what is a recession?

Lets look at “tax cuts” or “spending cuts” as another metaphor. Budgets are planned out years in advance. Politicians argue with each other and with the Presidential administration until they figure out a budget. This takes about 4 years. Suppose the original budget raised taxes by 3% per year and then politicians argue some more and taxes only go up 2% per year. This is what is called a “tax cut” even though taxes went up because the taxes went up less than expected. Same thing with spending, if we say we will increase spending by 3% and then only increase spending by 2% this is called a “spending cut” even though spending went up.

Confused yet? Yeah, I know it sounds stupid but this is politics and it makes very little common sense.

What about recession?

Typically the economy increases at; a mean of about 6%, a modality of about 6%, a median of 2.25% and a standard deviation of 7%. Wow, what the hell does that mean?

Unlike taxes and spending we do not say “recession” when the Gross Domestic Product or GDP raises at a lower than expected amount. Why would a politician use the same rules for GDP as they do for taxes and spending? That might make actual sense.

We could say that a recession is anything below average growth. Guess what? The growth in the 1990's during the Clinton admin never went UP TO the average growth. The highest growth was 6.4% and average is actually 6.5%. During the Bush admin the GDP grew at 6.5% in 2003 and 2004.

Well, I think the economy was pretty good in the 90's and not so great in 2003 and 2004. I could fudge the numbers and make it come out differently and sometimes politicians and economists do that. I won't. You can download the GDP history at www.bea.gov and use a pretty simple calculation to figure out the percentage of GDP increase (I use real dollars, not 2005 dollars). Essentially I divide the GDP of a year (CY or current year) by the previous years GDP (PY or previous year) divided by 100. So....cell=(CY/(PY/100)) or cell=(100-(CY/(PY/100))) which gives me a comparative percentage of change in the GDP from the previous year using the previous year as a standard.
Once we have that info we can calculate the average or mean, the median (Min +((Max-Min)/2)), the modality (You need to use the FREQUENCY function for this) and the Standard Deviation (stdev).

Guess what? That works okay and gives you the numbers we have discussed.

Using those numbers I would define anything below about 2% growth as a recession. The number is not exactly arbitrary but the math behind it becomes more complex. A more realistic growth mean of GDP is about 7.25%. The median is closer to 6 and the modality is still about 6. The standard deviation becomes about 2.5%. This gives us a normal curve running from about -1% to 13% that is skewed very slightly to the lower end. 70 of the 81 years of data fall within this range.

Ever been graded on a curve? Lets use a pretty standard curve grading procedure.

Lets grade the economy on a standard 4.0 grade. Anything over the mean + 2 standard deviations is a 4.0, outstanding. Between the mean and +1 std dev is a 3.0, Above Average, anything around the mean is 2.0 or average. Anything -1 std dev below the mean is a 1.0 or below average. Anything -2 std dev or more below the mean sucks or fails.

So essentially anything below about 2.25% growth becomes a recession or a failing grade.

This means that 2008 and 2009 were recession years according to the data from BEA.gov.

Personally, I think most people can agree with that.

2010 is now longer positive growth since we have drawn our grading line at 2.25 to 4.75, it becomes a “D”, a “1.0” and if you consider a 1.0 grade passing I don't care much for your education, but, it reality many consider it a passing grade so lets give 2010 a passing year.

When were the last two years we received a “C” for our GDP? 1987 and 1988. How about a “A”? 1983. Clinton receives a “C-” for GDP with all years within the range of C-, Bush receives an average “D” with 3 years of C and 5 years of “D”. These grades run 1993 to 2000 and 2001 to 2008. We could argue that the mortgage deregulation in 1999 during the Clinton admin caused the mortgage meltdown, but, whatever. In reality Congress has a lot to do with the budget and it takes 4 years for a president to take over the budget so Clinton's numbers should run from 1997 to 2004, Bush 2005 to 2012. I could “massage” the data around but I am leaving it like it is, admin oriented.

Typically the average person feels the effects of a poor grade or a good grade on the economy a year or two later. This is a subjective and rather arbitrary observation of my own based on economic perception and consumer confidence indexes.

In conclusion I believe any annual economic growth of the Gross Domestic Product below 2.25% is a recession. Economic Growth below 4.75% is BAD or “Piss Poor”. Economic growth at 7.25% plus or minus 1.25% is AVERAGE or GOOD.

Calling this economic mess anything except BAD is just political bull and it wastes everyone's time.