A committee at the nonpartisan National Bureau of Economic Research (NBER) meets at economic turning points to decide whether to declare a recession. The factors they consider are:
Real Personal Income, change from 1 year earlier
Employment level, change from 1 year earlier
Real manufacturing and trade industries sales, change from 1 year earlier
Real Personal Consumption Expenditures, change from 1 year earlier
Industrial production, total index, change from 1 year earlier
They are looking for broad indicators of the total economy.
The committee waits until revised data are released to determine whether there was a recession. This produces a lag of months. The committee is backward-looking. Not useful for day-to-day investment decisions.
What is the significance of the word recession? We know what it means. We know that to expect. The economy is slowing. If it walks like a duck . . .
Various organizations probably have policies in place about how to deal with recession. If officially declared, will they over react? Can they distinguish a soft landing and adjust reaction accordingly? Uncharted territory!!!
It’s kind of like official scoring at a golf tournament. The player’s score isn’t official until they complete their scorecard, sign it, and submit it. Until then, the results are unofficial.
Or maybe its like looking at a rainbow and trying to decide where red ends and yellow begins. There is no hard line, and the difference between being at points barely either side of the line is negligible. Yet one is determined to be “red” and the other is “yellow”.
That’s what we have here. This group’s formal declaration of a recession helps only in the rear view mirror. Potentially interesting for historians, but little more than that.
No, it just means not growing as fast. As a recent extreme example, after the covid crash US GDP expanded at a 35% (annualized) rate in the third quarter of 2020. In the fourth quarter growth was a more normal 3.9%. The growth rate was much slower, but it was not contracting. And not a recession.
Some of NBERs funding comes from government grants, although some also comes from private foundations (the same kind you find on PBS, e.g. the Alfred Sloan Foundation), and it gets grants from businesses and has subscription products as well.
But to answer your question, you can’t really know where you’re going if you don’t know where you’ve been. An obvious one, at least to me, is the economic reaction to the pandemic. What has the result been of the stimulus checks? The supply chain screw-ups? The lockdowns? How has the market reacted? How has the larger economy reacted? What was the delay-time from implementation to reaction in the various countries which implemented programs, and especially in those which did not?
These are the kinds of economic indicators that policy makers look to so they can advise on future events, certainly there will be a pandemic again in the future; how did this kind of thing work out for the last one? (Hint: they didn’t have them in 1919, and we don’t know.) Next time we will - at least we will have better information on which to make informed decisions.
There will also be war, famine, drought, pestilence, and lots of other macro-national and international events that will affect economies. It’s better to know something about them than fumble around in the dark every time, having learned nothing from prior episodes.