The Recession That Wasn't

Recession? Where? Looking back months from now, we may find that the economy grew 0.6 percent in the fourth quarter of 2007, 1.2 percent in the first quarter of this year, and 2.5 percent (according to a model from Macroeconomic Advisers) in the second quarter. Now my buddy Barry Ritholtz over at the Big Picture blog has criticized me and economist Brian Wesbury and CNBC's Larry Kudlow for having the temerity to conclude that since the economy expanded in the first quarter—gross domestic product rose at a 0.6 percent annual pace, according to preliminary government estimates—that the economy, well, expanded in the first quarter. (FYI: That initial take may have underestimated first-quarter growth by half given today's economic data, which showed a closing of the U.S. trade gap.)

Ritholtz goes on to note that of the 11 post-World War II recessions, four started with positive-growth quarters, two were flattish, and five were negative. Now all this may sound crazy if you had ever heard that recessions were defined as back-to-back quarters of negative growth. Indeed, by that measure, the 2001 recession was not a recession at all. But the National Bureau of Economic Research uses a more complex calculation. From the NBER website:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP. The NBER considers real GDP to be the single measure that comes closest to capturing what it means by "aggregate economic activity." The committee therefore places considerable weight on real GDP and other output measures.

Because of that more expansive definition—one that uses monthly data—the NBER has often labeled periods as recessionary even when the overall economy was occasionally growing on a quarterly basis. So according to the NBER, the economy peaked in March 2001 and bottomed in November 2001, even though the second and fourth quarters of 2001 saw positive GDP growth.

A couple more points on this little controversy:

1) It's not just the 1Q number that gives me hope. The jobs numbers—both initial unemployment claims and monthly payroll numbers—are also way below levels commonly seen during recession. Plus, corporate profit growth outside of financials and housing remains strong. Simply put, the recessionistas—to borrow a classic Kudlow zinger—are running out of time with both monetary and fiscal stimulus (bleh!) kicking in gear and the credit markets on the mend. If 2Q isn't negative, then what quarter will be negative, if any? Even the NBER doesn't declare recessions when the economy never actually has a single down quarter.

2) What's more, many bears say, this slowdown isn't supposed to be some mild hiccup where economists have to dig deep into the data to determine whether they met some technical, after-the-fact definition of recession. This is supposed to be the Big One, the Mother of all Recessions, a once-in-a-generation/lifetime purging of greed and liquidation of excess—of such enormous magnitude and degree that Bruce Springsteen will write folk ballads about it and Oliver Stone will make a sparsely attended movie about it. But so far the data say "no."