NOW It's Official

In an earlier post, I complained that the NBER had essentially redefined what we call a recession. By way of review, the problem I had was, first, we use definitions for a reason, i.e. to help us compare events over time -- how can we compare the current economic downturn to previous downturns if we keep changing the standard we use to compare them? Secondly, I felt that the NBER pronouncement was emblematic of the "talking down" of the economy being carried out by the media and some in the government; I certainly was not advocating burying our heads in the sand, but simply that we do not need to exacerbate the problem by creating further anxiety.

That said, with the release of fourth quarter GDP estimates by the BEA, we can officially declare ourselves to be in a recession. This makes it somewhat easier to compare current economic conditions with those of the past. According to the BEA release, preliminary numbers show GDP to have decreased by 3.8% in the fourth quarter of 2008 (note that these numbers are reported as an annualized rate -- in other words, if the fall in GDP seen in the last quarter continued for a full year, it would be a 3.8% decrease). Recall that GDP decreased by 0.5% in the third quarter. In terms of GDP, the current trend so far most closely resembles the beginning of the downturn in 1990-91. In the third quarter of 1990, inflation-adjusted GDP was unchanged from the previous quarter; this was followed by a 3% decrease in the fourth quarter of that year, and a decrease of 2% in the first quarter of 1991 with the resumption of moderate economic growth in the second and following quarters. Unemployment, however, is nearly a full point higher than it was at this stage of the 1990-91 recession; this could be a cause for concern. However, the current recession does not (again, so far) look to be following the trend of the recession of the early 1980's, which started off with a much deeper drop in GDP (7.8% in the second quarter of 1980) and higher unemployment.

So, we do have a recession, and just how bad it will be and how long it will last remains to be seen. We may have some hard knocks to take before it's over with. But, again, I hope that those in government and the media will refrain from doomsday speculation and hyperbole and just report the facts.

Addendum (27-Feb): The BEA revised their estimates for the fourth quarter to a 6.2% drop in real GDP, which makes the current recession look somewhat closer to the recession of the early 80's. It remains to be seen if it will be as protracted as that recession. Again, however, I reemphasize the importance of the media and government not "talking down" the economy, thereby making things worse.