What is a recession? The most widely accepted definition is a decline in our inflation-adjusted Gross Domestic Product (Real GDP) of at least two consecutive quarters. By that measure, we are almost surely in a recession. Because of an extremely steep fall in our output of goods and services in March, we know that Real GDP declined sharply in the first quarter of the year.
A Significant Decline In Economic Activity
Given the rapid increase in unemployment this month, and its expected increases during the next month or two, Real GDP will decline sharply in the second quarter of the year. So, it would appear that we are indeed in a very deep recession, and that a recovery will probably not set in until at least the summer.
But there’s an official body – the Business Cycle Dating Committee of the National Bureau of Economic Research – which is the final arbiter of whether or not a business downturn is officially a recession. Their definition is “a significant decline in economic activity spread across the economy, lasting more than a few months.”
Looking at the economic downturn so far, there has surely been a very significant decline in economic activity in March, which will continue through April and May, and possibly well into the summer. But the question that none of us can answer is how long it will be before our economy will begin to recover.
Until the coronavirus has been brought under control, this economic downturn will continue. Will this take more than a few months? And how many months constitute a few months?
A Look At The Previous Recessions
As New York Governor and Democratic presidential candidate Al Smith used to say, “Let’s look at the record.” Since the Great Depression of the 1930s, our economy has gone through twelve recessions. The shortest was from January to July, 1980 (seven months).
So, if the current downturn were to last from March through September, then the Business Cycle Dating Committee would surely label it a recession. Indeed, considering the depth of the downturn, the committee might be inclined to consider a March-August or even a March-July downturn a recession.
As we begin easing up on our social distancing policies in an effort to restart the economy, how quickly can we arrest our falling output of goods and services and actually begin to grow the economy? And once we do, would that mark end of the recession? Almost always it would. But these are not ordinary times.
The Second Wave
Let us say that we reopened the economy in stages, starting in early May. So far, so good. But then, as social distancing declines, new cases of the coronavirus will probably begin to rise again, forcing us to once again close millions of businesses and lay off tens of millions of employees.
A lot is going to happen over the next two or three months. Obviously, President Donald Trump is anxious to at least begin to restore the economic prosperity we enjoyed during his first three years in office. If he succeeds, then it is conceivable that our current downturn ultimately will be too short to be labelled a recession.
On the other hand, we are taking a tremendous risk by opening up most of our economy before the coronavirus is more fully brought under control. My own prediction – for what it’s worth – is that we are going to end up with the worst of both worlds – the additional deaths of tens of thousands of Americans and a long and extremely deep recession. Indeed, the big economic question will be whether to call it a depression.