What, exactly, is the definition of a recession?
Economists have evolved to decide that, in general, the economy is in recession when the nation’s Gross Domestic Product (GDP) contracts, or shrinks, for two consecutive quarters. But an economy can exist in a sort of limbo in which it feels sick, but isn’t weak enough to be called officially sick by economists. This is sort of like coughing, sneezing and having a sore throat, without being able to say that you actually have a cold.
The absence of a recession as defined by economists, then, does not mean that the economy is actually healthy. You can feel like the economy is in recession even when it isn’t. You can generally tell something is wrong with the economy when economists start cheerleading it. This is what you are seeing today.
When you lose your job, or are on the victim end of your employer’s efforts to downsize significantly, you may feel like the economy is in a downright depression. As presidential candidate Ronald Reagan famously said during his 1980 campaign seeking to limit then-current President Jimmy Carter to one term:
“Recession is when your neighbor loses his job. Depression is when you lose yours. And recovery is when Jimmy Carter loses his.”
The economy actually grew in the fourth quarter of 2015, but at the anemic annualized rate of 0.7% … certainly far from what any economist would define as a healthy economy. Several factors serve to somewhat explain this rather dismal economic report:
- Some sectors, such as manufacturing, actually are in recession as defined by the consensus of economists.
- Although unemployment remains at a normally healthy 5%, household income is actually down, not up, over the last few years. This means more people are working but making less money. Combine this income drop with inflation at about 2%, and you have a situation where things cost more, but everyone has less money to pay the increasing prices.
- A healthy economy will normally have job growth that will see months of 500,000 to even 800,000 jobs created. Though Obama Administration officials and Senate Democrats have correctly pointed out that the economy has had now 70 consecutive months of job growth, the growth is generally between 70,000 and 250,000 jobs. Most economists believe that we need at least 150,000 jobs created each month merely to keep pace with population growth. So politicians can crow about a month of job growth of 70,000 jobs, but the net effect of such a month is literally job contraction, not growth.
- Gas prices are down – a good thing. But several economic sectors are suffering because of it. What you save in gas, someone else will likely pay in decreased wages or a lost job. A trip to Midland/Odessa, Texas will show you that micro economies depending on robust oil production are hurting. Badly.
- The Federal Reserve Bank finally, just last month, raised interest rates. They had spent literally years attempting to justify raising them but held up for reasons listed above. The proverbial gust of wind that finally pushed them over the edge in December 2015 was job creation in November of about 211,000 – again, anemic by any economic standard, but the 69th straight month of some job growth.
If, after hearing current politicians and even some economists feigning euphoria over the economy and job reports, you sense something is not quite right, you are both correct and far from alone. Does that mean you’re in a depression or recession? That’s a question perhaps best answered by President Ronald Reagan.