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1 [1] (September 30, 2024)

handle is hein.crs/goveqtz0001 and id is 1 raw text is: Con gressionol Research Service nforming the IegisI9tive debate since 1914 September 30, 2024 Defining Recession Over time, an economy fluctuates between periods of above- and below-average short-term growth. These fluctuations are referred to as the economy's business cycle. As the economy moves through the business cycle, gross domestic product (GDP) and several additional economic indicators rise and fall. Policymakers may seek to act preventatively or swiftly when recessions occur, making the identification of recessions a critical component of fiscal and monetary policy. This In Focus discusses how U.S. recessions are officially defined, what rules of thumb economists and policymakers use to gauge the health of the economy, and how accurate those unofficial measures tend to be. For further discussion of the business cycle and the economy, see CRS In Focus IF10411, Introduction to U.S. Economy: The Business Cycle and Growth, by Lida R. Weinstock. Dating the Business Cycle Although fluctuations in economic activity are referred to as a cycle, the economy generally does not exhibit a regular and smooth cycle. Predicting recessions and expansions is notoriously difficult due to the irregular pattern of the business cycle. There may also be short periods of decreasing economic activity interspersed within an expansionary period and vice versa. Recessions are also not a consistent length or depth-the past two recessions, for example, were two months and 18 months, respectively, but were both deep relative to most historical recessions. For more information about recessions and their causes, see CRS Report R47479, Common Causes of Economic Recession, by Lida R. Weinstock. Business cycles are dated according to the peaks and troughs of economic activity. A single business cycle is dated from peak to peak or trough to trough. Recessions are not determined by the federal government and are not defined in statute. The National Bureau of Economic Research (NBER)-an independent nonprofit organization that conducts and disseminates economic research-is generally credited with determining recession start and end dates in the United States. Techncal Defnit ion of Recession NBER defines recession as a significant decline in economic activity that is spread across the economy and that lasts more than a few months, but it does not have a set numerical formula to determine a recession. Instead, NBER evaluates three criteria-depth, diffusion, and duration-using a variety of monthly economic indicators including income, employment, consumption, sales, and industrial production. An outsized impact to one criterion can make up for a weaker impact to another. For example, in July 2021, NBER declared the United States to have been in a recession from March to April 2020 owing to the extreme drop in economic activity, despite the brevity of the contraction. Because NBER considers length and depth of economic downturns in determining recessions, it dates recessions and expansions with a lag. The length of the lag is not consistent across all business cycle dating, but it can be many months after the recession began. While historical dating of recessions is important in terms of understanding and learning from past economic business cycles, economists and policymakers must often rely on other indicators in order to implement timely policy responses. Ru -of-Thumb Recession Indcators Given that a timely policy response to an economic downturn is generally advantageous, economists and policymakers tend to look to unofficial, rule-of-thumb recession indicators that provide more real-time information that can inform policy decisions. Many such indicators exist, and economists follow these indicators closely-either to predict impending recessions or to track the business cycle in real time. While no rule-of- thumb indicator perfectly maps onto all cases of officially declared recessions, each can provide insight into economic conditions that may be helpful for policymakers. While there are many ways to track economic conditions and model the likelihood of impending or current recession, three popular indicators are two quarters of negative real GDP growth, the Sahm rule, and the inverted yield curve. As of August 2024, both the Sahm rule and the yield curve indicate that the U.S. economy is in or nearing a recession. Two Quarter Negative GDP Rule A popular rule of thumb is that recessions feature at least two consecutive quarters of decreasing real (inflation adjusted) GDP, often characterized as negative growth. GDP is the primary measure of economic activity, so it stands to reason that recessions would feature some amount of negative growth. Each of the 12 U.S. recessions since 1947 has featured negative growth. However, not all recessions feature two consecutive quarters of negative growth. For example, the recession that occurred at the beginning of the COVID-19 pandemic was two months long, not even the length of one quarter. In addition, two quarters of negative growth can occur independent of a recession. For example, real GDP growth was negative in the first and second quarters of 2022 (largely owing to high inflation as opposed to negative nominal growth, high unemployment, or other conditions associated with

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