Klaus Abberger

Wolfgang Nierhaus

English

Research Papers in Economics

CESifo Forum 4/2008 74
Spotlight
HOW TO DEFINE A
RECESSION? 
KLAUS ABBERGER AND
WOLFGANG NIERHAUS*
The famous “R-word” is back again. Not only econ-
omists are discussing whether the world economy,
regions or specific countries are in or close to reces-
sion.Also the public media and ordinary people are
concerned about a recession. But the question must
be asked: what actually constitutes a recession? This
is ultimately a matter of definition, which unfortu-
nately is not answered homogeneously in the schol-
arly literature and also not in the practice of interna-
tional organisations or statistical offices.
Business-cycle analysts generally use the concept of
a recession to refer to weak economic phases, of
which duration,depth and diffusion exceed the usual
bounds; thus one speaks of the “three key dimen-
sions of a recession, known as the ‘three Ds’: dura-
tion, depth and diffusion” (Fiedler 1990, 131).1 This
means that in a recession economic activity decreas-
es substantially, the decline affects wide portions of
the economy and it has some permanence. In the
United States the Business Cycle Dating Committee
at the National Bureau of Economic Research
(NBER) is responsible for the dating of the US busi-
ness cycle.2 The NBER describes the concept as fol-
lows:“a recession is a significant decline in econom-
ic 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”. However, even this NBER
specification shows that the term is not narrowly
defined and contains some leeway for determining
whether an economy is in recession or not. Since a
judgment based on these criteria requires the analy-
sis of extensive data; the NBER publishes its official
recession dating for the US economy with consider-
able lags of often more than one year.3
For this reason another definition has become popu-
lar among business-cycle observers in the United
States,and increasingly also in other countries,which
was first published by Julius Shiskin in The New York
Times in 1974.4 According to Shiskin a recession is
defined as “a decline in the seasonally and calendar
adjusted real gross domestic product (GDP) in at
least two successive quarters”. Since GDP is the
most comprehensive indicator of economic activity
and the critical period for a recession amounts to at
least six months, with this rule of thumb the two cri-
teria of diffusion and duration are roughly taken into
account.What is the NBER’s position on this defini-
tion? It adds: “most of the recessions identified by
our procedures do consist of two or more quarters of
declining real GDP, but not all of them. Our proce-
dure differs from the two-quarter rule in a number
of ways”.5
The main disadvantage of the Shiskin rule is that the
rate of change of the seasonally and calendar adjust-
ed GDP go through erratic fluctuations due to sub-
sequent data revisions, whereby a minus can easily
become a plus. For the recession of the US economy
from March until November 2001 officially regis-
tered by the NBER dating,6 the results of the Bureau
of Economic Analysis up to July 2002, for example,
showed a minus in real GDP only for the third quar-
ter, and subsequently for the first three quarters of
2001 in succession.According to present calculations
(GDP:first quarter 2008 final) the pluses and minus-
es in 2001 alternate from quarter to quarter so that
the rule of thumb does not signal a recession for the
United States in 2001 (see Figure 1).
Applying this criterion to Germany, there would be
more recessions than have been normally counted.
* Ifo Institute for Economic Research.
1 Fiedler, E. R. (1990),The Future Lies Ahead, in: Klein, P.A. (ed.),
Analyzing Modern Business Cycles, Essays Honoring Geoffrey H.
Moore,Armonk, NY: M. E. Sharpe.
2 http://www.nber.org/cycles/recessions.html.
3 For Germany the Bundesbank – the only official German institu-
tion to do so – has published, in its supplement,“Saisonbereinigte
Wirtschaftszahlen”, a chronology of economic activity up to 1997
measured in terms of the local minimums and maximums of the
trend-adjusted industrial production in Germany.
4 Achuthan, L. and Banerji, A. (2008), The Risk of Redefining
Recession, CNNMoney.com, May 6.
5 http://www.nber.org/cycles/recessions.html.
6 http://www.nber.org/cycles/july2003.html.CESifo Forum 4/2008 75
Spotlight
There is general agreement that recessions occurred
in 1974/75, 1980/82 and 1992/93. The rule of thumb,
however, has identified more recessions than these,
which is ultimately due to the fact that in Germany
the trend growth rate of total economic output is
lower than in the United States. In the current
decade alone,GDP,seasonally and calendar adjusted
using the BV4.1 and based on the current data status
(National Accounts, 2nd quarter 2008), has fallen
twice in at least two successive quarters: from the
fourth quarter of 2002 to the first quarter of 2003
and in the second and third quarter of 2004. Since
real GDP declined only slightly, these were not
recessions but only pronounced phases of economic
weakness.
Accordingly, for there to be a recession real GDP –
using the rule of thumb – has to have clearly fallen
for at least two quarters. In order to adequately
determine the position of the economy in the busi-
ness cycle, also the utilisation of
production capacities should
always be taken into considera-
tion. Business cycles, according
to modern business-cycle theory,
are to be understood as varia-
tions in the utilisation degree of
aggregate production potential
(growth cycles). Every cycle
consists of one upswing and one
downturn phase, with the indi-
vidual phases being linked by
upper and lower turning points.
In this delimitation downturn
phases include both phases with
absolutely falling production
activity as well as phases with
increasing production activity
that is lower than average
(decreasing capacity utilisation)
– measured in terms of the
potential rate. When, after a
strong upswing stage with higher
capacity utilisation than the
average, real GDP, seasonally
and calendar adjusted, falls in
two successive quarters but the
utilisation rate remains above
the normal level, one should not
speak of a recession. A reces-
sion, according to our definition,
is only the case when with clear-
ly slowing output,seasonally and
calendar adjusted (e.g. in at least
two successive quarters), the aggregate utilisation
rate is also simultaneously clearly below its long-
term average.7 Using the survey-based Ifo capacity
utilisation in manufacturing as proxy for the aggre-
gate utilisation rate, this broader recession criterion
was fulfilled in the above-listed recessions in Ger-
many: 1974/75, 1980/82 and 1992/93 (see Figure 2).8
For the world economy as a whole,however,the def-
inition of recession that we have discussed cannot be
reasonably applied because the combined real GDP
of the world has increased continuously in the last
 94
 96
 98
 100
 102
 104
I II III IV I II III IV I II III IV
-4
0
4
8
12
16
REAL GROSS DOMESTIC PRODUCT IN THE US, 2000–2002
seasonally adjusted
Growth rate in %
percent change from previous period, annualized
Source: BEA; NBER; Ifo calculations.
Index, first quarter 2001 = 100
2000
Annual figures
percent change over previous year
Shaded area represents the most recent dated US recession (from March to November 2001)
3.7%
1.6%
2001 2002
0.8%
Figure 1
72.5
75.0
77.5
80.0
82.5
85.0
87.5
90.0
92.5
95.0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Shaded areas represent periods of recession
Seasonally adjusted by ASAII
Smoothed by weighted local polynomial regression (a)                
Source: Ifo Business Survey.
in %
(a) Abberger, K. and W,. Nierhaus (2008), Die ifo Kapazitätsauslastung - Ein koinzidenter Indikator der 
deutschen Industriekonjunktur, ifo Schnelldienst 61(16), 15-23.
IFO CAPACITY UTILISATION IN MANUFACTURING AND RECESSIONS
 IN GERMANY
Average 1978–2008
Figure 2
7 For the situation of the world economy and the German economy
in autumn 2001, see ifo Schnelldienst 20/2001, 18.
8 Results from Ifo business tendency surveys in manufacturing.
Respondents are asked to assess the capacity utilization rate of
their machines and equipment on a categorical scale.For a detailed
analysis of the time series and its behaviour, see Abberger, K. and
W. Nierhaus (2008), Die ifo Kapazitätsauslastung – ein gleichlau-
fender Indikator der deutschen Industriekonjunktur, ifo Schnell-
dienst 61(16), 15–23.CESifo Forum 4/2008 76
Spotlight
four decades, on average, which is due to the higher
trend growth in the emerging markets. Hence, there
are no generally accepted rules for a definition of a
world recession. According to the International
Monetary Fund (IMF), there have been three com-
prehensive growth recessions since 1970–1975, 1982,
and 1991 – in which global economic growth re-
mained below the two percent level. Adjusted for
the increase in the world population, the rate of
change of real GDP was even negative in 1982 and
1991.All in all,the IMF in identifying recessions now
focuses – similar to NBER – on a number of month-
ly indicators, for example, world industrial produc-
tion or world trade volume.9 On the other hand, ref-
erence is also made to a definitive annual world
growth threshold (+ 3 percent), below which the
IMF sees a global recession.10 Using this new IMF
rule,in the past three decades the years 1980 to 1983,
1990 to 1993, 1998 as well as 2001 and 2002 were at
or below this threshold. For 2009 the IMF predicts
+ 2,2 percent growth.So it considers the world econ-
omy in a global recession (see Figure 3).
0
1
2
3
4
5
6
7
8
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Shaded areas represent periods of global recession
World output, percent change over previous year
Source: IMF.
WORLD OUTPUT AND GLOBAL RECESSIONS
in %
IMF annual world growth threshold for global recession
2008 and 2009: Forecasts
Figure 3
9 International Monetary Fund (2002), World Economic Outlook,
April, 10–12.
10 International Monetary Fund (2008),World Economic Outlook,
October, 43.

How to Define a Recession?

http://www.cesifo-group.de/portal/page/portal/DocBase_Content/ZS/ZS-CESifo_Forum/zs-for-2008/zs-for-2008-4/forum4-08-spotlight.pdf

How to Define a Recession?

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics