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YOU DECIDE: Is the recession over?

April 30, 2010

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu


Dr. Mike Walden
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Have you heard the good news? Many economists think the recession is actually over. Indeed, these economists say the economy has been recession-free since last summer. If true, this means we've been in an economic recovery for almost a year!

Yet when we look around and see the unemployment rate at double-digits, many families still struggling to pay bills and governments having to cut services to make budgets balance, how can any knowledgeable economist say the recession is over?

Here, I have to stick up for my colleagues, because based on the technical, economic definition of a recession, it could very well be a thing of the past. The problem is there's a difference between how an economist defines a recession and how a recession is considered among the general public.

To an economist, being in a recession doesn't mean everything is bad, financially speaking, and being out of a recession doesn't mean everything is good. Instead, a recession is part of the cycle we observe most economies going through - something we call the business cycle.

There are two parts to the business cycle, expansion and recession. During expansion, the economy is growing, sales are increasing, jobs are being added and optimism about the future is improving. During recession, the opposite happens - the economy is shrinking (receding), sales are declining, jobs are being cut and pessimism about the future takes hold.

One complete business cycle includes an expansion and its corresponding recession. So the process over time is an expansion following by a recession, then followed by another expansion, then followed by another recession and so on. We are now in the 11th of these business cycles since World War II.

Fortunately, the average recession is not as severe as its matching expansion, so the economy does make progress over time. For example, in the 10 business cycles since the 1940s previous to the current one, the average expansionary period lasted almost five years, while the average recession spanned only 10 months.

Now, here's the clincher - here's what distinguishes an economist's view of a recession from that of a non-economist. An economist says a recession is over once the economy has bottomed out and begins to move higher - that is, begins to expand again. As long as the economic indicators are moving higher, that's all it takes for a recession to end. This is in spite of the possibility that it may take months, or even years, for the economy to return to pre-recessionary levels.

An analogy may be helpful. Think of the economy as a car being driven up a hill. As long as the car moves upward, the economy is expanding. However, let's say the car stalls and moves back down the hill 1,000 feet. Now, we would say the economy is in a recession. But once the car stops and the driver is able to resume climbing the hill, we would say the recession is over.

The difference between an economist and a non-economist is the economist says the recession is over even though it may take several minutes for the driver to make up the lost 1,000 feet. A non-economist's view is the recession is over only when the 1,000 feet have been reclaimed.

So from an economist's perspective, what's the evidence the economy is moving forward? Several indicators suggest this is the case. Our broadest measure of economic activity, Gross Domestic Product (GDP), has been increasing since last June. Likewise, factory output, orders at service firms, retail sales and household wealth have all been improving since last year. Even one measure of jobs has been increasing since last fall.

But how long will it take for the non-economist's definition of a recession - that it's not over until pre-recessionary levels of economic measures are reached - to occur? GDP may actually completely recover by late this year. However, jobs are a whole other matter. The current thought is it will be three to four years before the jobs lost during the recession are recovered. And even then, most of them will be different jobs.

There is no right or wrong answer about when a recession ends. Importantly, it depends on the definition of a recession. The economists' definition is more lenient - a recession is over as long as major economic indicators are improving. The non-economist's definition is stricter - a recession is not over until all that was lost during the recession is recovered. You decide what standard makes most sense to you. If you choose the second definition, I'll understand.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at April 30, 2010 08:40 AM