Recession obsession has pantomime feel

The discussion of the prospect of an American recession often smacks of pantomime. In response to the question of whether America is already in or about to enter a recession some chant “oh yes it is” while others respond with “oh no it isn’t”.

Part of the problem is that there is no universally accepted definition of what constitutes a recession. And those definitions that do exist often leave open room for debate.

The most common definition used in Britain is two consecutive quarters of falling output. This has the virtue of simplicity and transparency. Either a country’s GDP figures meet these criteria over a certain period or they do not. However, it is also arguably a crude measure. An economy can experience a significant downturn without meeting this technical definition of a recession.

The main alternative approach, and the most common in America, is to see whether the economy has a significant period of below trend growth in several areas such as GDP, employment, industrial production and retail sales. In America a committee of experts associated with the National Bureau of Economic Research examines such statistics and, when it deems it appropriate, declares that the country has entered a recession. Wall Street and other institutions often make their own calls based on similar criteria.

This approach has the advantage of flexibility but also opens room for interpretation. It is arguably positive that small increments in the GDP figures do not determine whether there is a recession or not. But it also means that different groups of experts can look at the same data and come to contrasting conclusions.

But the biggest problem with the debate is not the lack of an agreed definition but the obsession with definitions itself. There is far too much concern about whether the outlook for the American economy can be labelled as recessionary. Conversely there is too little emphasis on examining what is happening in the economy.

The important thing to understand is what is happening in the economy rather than what label to apply. Such an understanding means grappling with a variety of facts and figures. Inevitably, such reality, like life itself, can be messy. Obsessing over labels may make things appear simpler but the reality will remain complex. Better to try to grapple with what is really happening than to play with words.