False definition: “A recession is two consecutive quarters of negative GDP growth.”

It’s OK to use “two consecutive quarters of negative growth” as a rough rule of thumb for a recession. (Variants include replacing “growth” with “real growth”, “per capita growth”, “real per capita growth”. Everything written here applies equally to such variants.)

It’s wrong to claim that this is the definition of a recession. Economists do not use any such definition.

This was made clear by the short and sharp recessions experienced by many economies around the world circa March 2020. The US National Bureau of Economic Research (NBER, 2021) dated the US as having entered and exited a recession in February and April 2020:

The recession lasted two months, which makes it the shortest US recession on record.

Unfortunately, many high schools around the world incorrectly teach that a recession is defined as “two consecutive quarters of negative GDP growth”. This mistake is also made by the International Baccalaureate (IB), Cambridge International A- and AS-Levels, textbooks, and Singapore JCs.


Economists Don’t Have A Simple and Precise Definition of Recession

  • San Francisco Fed (2007):

journalists often describe a recession as two consecutive quarters of declines …

The definition used by economists differs.

  • US Bureau of Economic Analysis (2018):

two consecutive quarters … is not an official designation. … The NBER recession is a monthly concept that takes account of a number of monthly indicators—such as employment, personal income, and industrial production—as well as quarterly GDP growth. Therefore, while negative GDP growth and recessions closely track each other, the consideration by the NBER of the monthly indicators, especially employment, means that the identification of a recession with two consecutive quarters of negative GDP growth does not always hold.

  • US Congressional Research Service (2021):

NBER does not define a recession as two consecutive quarters of declining real GDP, which is a popular metric used by the media. Rather NBER uses a broader definition of a recession, as a period where there is a significant decline in economic activity that spreads across the economy. NBER uses a number of indicators to measure economic activity, including real GDP, economy-wide employment, real sales, and industrial production.

  • US NBER Business Cycle Dating Committee (2001):

A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade. 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. …

Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The traditional role of the committee is to maintain a monthly chronology, so the committee refers almost exclusively to monthly indicators. The committee gives relatively little weight to real GDP because it is only measured quarterly and it is subject to continuing, large revisions …

there is no fixed rule

  • UK Office of National Statistics (2020):

There has been a long-standing convention in the UK that a “technical” recession comprises two consecutive quarters of contracting output. … However, there are drawbacks to such a simple rule, heightened in real time, given the scope for data revisions.

We recognise that the concept of a “technical” recession has been widely accepted by many users. However, the state of the economy is more complicated than could be encapsulated by a simple rule-of-thumb, particularly when there is an inherent level of data uncertainty.

  • After quoting Burns and Mitchell’s (1946) definition of a business cycle, the Monetary Authority of Singapore (2001) continues,

In contrast to this rather detailed definition of a business cycle, there exists the more ad hoc and commonly referred to “technical recession” — two consecutive quarters of negative growth in GDP. The term was popularised by a famous American economist, Arthur Okun, in a speech he gave in the early 1960s. …

The “two-quarter contraction” definition of a recession, albeit simple and easy to use, is a simple generalisation based on empirical observation of the past. This “rule of thumb” may not be applicable to all slowdowns and cannot be used as a hard and fast rule.


Okun’s Invention?

Many (including the two below) attribute the two-quarter rule of thumb to Arthur Okun. (I’ve not been able to find any direct quotes or writing by Okun on this matter.)

To satisfy impatient politicians, the economist Arthur Okun (an advisor to Presidents Kennedy and Johnson) suggested that two consecutive quarters of shrinking gross domestic product (GDP) be used to signal a recession. In 1980, however, the United States entered into a recession with only one quarter declining GDP.

  • Jay (as quoted by The Telegraph, 2008)

the definition – two consecutive quarters of negative growth – had no basis in economic theory and was created by the US Government in 1967 to aid the re-election prospects of President Lyndon Johnson. …

[Jay] was “in the room” when the definition was established … Okun, the chairman of Johnson’s economic council, acted upon “indications that there might be a recession that year”, which he feared would dent the President’s popularity. …

Art had the neat idea that if we had a definition of recession which meant that people could say we are not actually in a recession, not technically, that would get the president out of a difficulty.

So on the back of an envelope he invented the idea that in order to call it a recession you had to have had two consecutive quarters of negative growth.

This was completely arbitrary – there was absolutely nothing scientific or in the economic theory that requires that a recession be defined in that way. It was just a neat device by a clever economist trying to help his chief who was faced with a political challenge.


What Should Instead Be Taught

Of course, one is free to define terms as one wishes. But since economists do not define a recession by any two-quarter rule, it is probably a mistake for high-school teachers to teach this as the definition.

Teachers should instead make clear that

  • this is merely a rough rule of thumb beloved by journalists for its simplicity and
  • which has gained widespread currency among non-economists.
  • Economists do not use any such definition;
  • instead, they look at a broad range of factors to determine whether an economy is in recession;
  • indeed, they have no simple and precise definition of a recession (or formula for identifying one).

Journalists also like to speak of technical recessions (as contrasted with officially announced recessions). But this is a term that economists rarely or never use (except when referring to the work of journalists).


Some Textbooks That Make the Above Points Clear

  • Abel, Bernanke, Blanchard, and Croushore (2017):

Aggregate economic activity isn’t measured directly by any single variable, so there’s no simple formula that tells economists when a peak or trough has been reached. …

A conventional definition used by the media—that a recession has occurred when there are two consecutive quarters of negative real GDP growth—isn’t widely accepted by economists. The reason that economists tend not to like this definition is that real GDP is only one of many possible indicators of economic activity.

  • Hall and Lieberman (2012):

Newspapers and television commentators often state that a recession occurs when real GDP declines for two consecutive quarters. But that is not officially correct. During the recession of 2001, for example, real GDP never declined in two consecutive quarters. Our most recent recession began in December 2007, even though a two-quarter decline in real GDP did not begin until the third quarter of 2008.


Think Continuously, Not Binarily

Here we have the fabled “teachable moment”: Stress continuous rather than binary thinking. Most variables in the real world are continuous. Nature does not make jumps (Natura non facit saltum—Marshall’s epigraph, 1890). (This point should already have been made and repeatedly emphasized by the economics teacher, but usually isn’t.)

It makes little sense to classify a human being as being in only one of two states: healthy or unhealthy. Similarly, it makes little sense to classify an economy as being in only one of two states: recession or expansion.

Such binary classifications may be useful for legal or administrative purposes. But they’re not very useful for the doctor or economist who wants to diagnose problems and offer prescriptions. This then is why the economist isn’t too concerned about having a precise definition of a recession.

(Which isn’t to say anyone should teach the two-quarter “definition”. Teach instead that there’s no simple and precise definition. And explain why there can’t be. Yes, that’s one less clear-cut question available for homework or exams. But that’s also one less falsehood taught to students.)


Wrong Definitions by IB, Cambridge International, Textbooks, and Singapore JCs

IB:

  • 2013-11 H2 Markscheme (p. 3): when an economy experiences two consecutive quarters of falling output;
  • 2012-11 S2 Markscheme (p. 16): a decrease in real GDP for at least two consecutive quarters (or two consecutive quarters of negative economic growth);
  • 2012-05 S2 Markscheme (p. 11): when an economy experiences negative economic growth (a fall in GDP) for at least two quarters consecutively;
  • 2007-11 H3 Markscheme (p. 17): at least two consecutive quarters of negative economic growth;
  • 2007-05 S2 Markscheme (p. 11): two or more consecutive quarters of negative economic growth;
  • 2005-11 H3 Markscheme (p. 12): at least two consecutive quarters of negative economic growth;
  • 2005-11 S2 Markscheme (p. 12): At least two consecutive quarters of negative economic growth;
  • 2004-11 H3 Markscheme (p. 3): at least two consecutive quarters of negative growth;
  • 2003-11 S2 Markscheme (p. 6): two consecutive quarters of negative growth.

Cambridge International 9708 Examiner Reports:

  • 2005-06 Examiner Report (p. 8): candidates correctly defined recession as two consecutive quarters of negative growth;
  • 2017-05 Principal Examiner Report (p. 17): A recession can be represented by a fall in GDP for at least two consecutive quarters.

Textbooks:

  • Pirayoff (2007, CliffsAP): Two consecutive quarters of this phase denotes a recession.
  • Sloman, Garratt, Guest, and Jones (2016, Economics for Business, 7e, p. 20): A recession is defined as where output in the economy declines for two consecutive quarters or more
  • Arnold (2004): According to the standard definition of recession, two consecutive quarter declines in Real GDP constitute a recession
  • Begg, Vernasca, Fischer, and Dornbusch (2020): A recession denotes two consecutive quarters of negative GDP growth

I was surprised to find this mistake in a textbook by Rüdiger Dornbusch (died 2002) and Stanley Fischer (D&F).  I was not able to find any instances of this mistake in earlier editions of D&F’s textbooks—e.g. Economics (1983) or Macroeconomics (1993, 6e). I suspect that (i) this mistake was added only by David Begg and Gianluigi Vernasca (who seem to have taken up the task of pumping out new textbooks under D&F’s names); and that (ii) D&F had little contribution to this mistake (or these new textbooks).

  • O’Sullivan and Sheffrin (2001): Economists talk more in terms of quarters of the year—consecutive three-month periods—than in terms of months . So they would say that when real GDP falls for two consecutive quarters, that’s a recession.
  • Nellis and Parker (2004): A recession is commonly defined as a situation when the level of economic activity has fallen for at least two consecutive quarters (i.e. at least two three-month periods). Note that this definition is based on at least two consecutive quarters. When an economy starts to recover after only two consecutive quarters, it is said to have experienced a technical recession. In addition, the term growth recession may be used to describe a situation when the economy is growing below its long-term trend but is not reporting an actual fall in output.
  • Gwartney, Stroup, Sobel, and Macpherson (2022): In an effort to be more precise, many economists define a recession as two consecutive quarters in which there is a decline in real GDP.
  • Tucker (2016): A recession is generally defined as at least two consecutive quarters of real GDP decline.
  • Rush (1996): recession — when real GDP decreases for at least two consecutive quarters

Singapore Junior College (JC) A-Level Economics (H1 or H2):

  • Anglo-Chinese JC, 2014 H2 Prelim Q6 Answers (p. 1): Recession is an economic condition when a country experiences a decline in Gross Domestic Product (GDP) over two consecutive quarters (six months).
  • Catholic JC, 2016 H1 Prelim Mark Scheme (p. 29): Define recession: an economic condition when a country experiences a decline in Gross Domestic Product (GDP) over two consecutive quarters (six months).
  • Hwa Chong Institution, 2014(?) H2 Prelim(?) Mark Scheme (p. 22): Recession is where EG is negative for two consecutive quarters.
  • Jurong JC, 2016 H1 Prelim Answer Booklet: During a recession, an economy registers negative growth for at least two consecutive quarters and unemployment rate rises.
  • National JC, 2018 H2 Prelim Answers (p. 24): A recession is defined as two consecutive quarters of a fall in real GDP.