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This topic has been a bit politicized. The common perception that two consecutive quarters of negative GDP growth counts as a recession is a myth. There is actually a committee that determines whether we are in a recession.

Politics aside, just looking for a factual answer: was there an instance in the history when two consecutive quarters of GDP decline wasn't classified as recession?

Ok, let me try to be a bit more explicit. Was there an instance in United States, where officially published GDP has two consecutive quarters of negative GDP growth, but the Business Cycle Dating Committee of the National Bureau of Economic Research did not classify it as recession?

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  • $\begingroup$ Is your question specific to the US? If so, add the usa tag. $\endgroup$
    – Herr K.
    Jul 26, 2022 at 15:49

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Yes, there was such an instance in 1947 (q2 and q3) where official GDP registered a decline, enter image description here

but the NBER US Business Cycle Expansion and Contractions data does not define it as a recession. enter image description here

Apart from 1947, there was only one period (Q4 1969 - Q1 1970) with comparably low declines in real GDP in two consecutive quarters (see the original BEA source for example). That time was declared a recession though. More on that below.

There have also been 3 quarters where the first and third were negative, but the second positive. These periods were either declared recessions (e.g. 1960) or not (e.g. 1956).

Excursion:
A recession can even be shorter than 2 quarters. For the most recent recession, the committee has determined

"that a trough in monthly economic activity occurred in the US economy in April 2020. The previous peak in economic activity occurred in February 2020. The recession lasted two months, which makes it the shortest US recession on record."

Following this definition, the recession was declared over before the second quarterly decline in GDP occurred. that said, these announcements come with a significant lag. Also, all other recessions (apart from one in 1980) lasted longer than two quarters, which makes it very difficult to show that the two quarter rule of thumb is not followed.

James D. Hamilton computes the so called GDP-based recession indicator and the associated Dates of U.S. recessions with a mathematical model solely based on GDP data. You may also find James D. Hamilton's The Econbrowser Recession Indicator Index interesting to read. It states that:

Of the 45 quarters up to the date that paper was written for which the NBER said the U.S. was in recession, 19 were actually characterized by at least some growth of real GDP.

This indicator never changed its methodology since it was created 17 years ago (it was computed retrospectively for longer periods). It showed 5 out of 8 times that there is a recession before the first decline in GDP. The remaining 3 times, the start of the recession coincided with the first negative GDP number. Interestingly, this time, the indicator does not yet say it is a recession. Noteworthy, James D. Hamilton's indicator flagged the aforementioned Q4 1969 - Q1 1970 period as a recession two quarters in advance.

Similar measures also show little increase in recession probabilities yet. For example, Smoothed recession probability usually increases prior to recessions. Since we do not know yet if and when NBER will call this a recession it is not yet possible to claim this time is different.

Last but not least, GDP is subject to measurement error. For example, BEA computes using a 90 percent confidence criterion based on data from 1996 - 2018, that the revision between the advance and second estimates is in the interval (−0.94, 1.14). This means that if the advance estimate for some quarter was 1 percent at an annual rate, one could say that with 90 percent confidence, the second estimate would be between −0.04 percent and 2.04 percent. Insofar, a negative GDP value itself need not mean a recession, even if you were to only look at GDP.

In any case, it will be interesting to see what happens going forward. High energy prices, declining consumer sentiment (which often goes hand in hand with increases in energy prices), interest rate hikes, which in turn will likely impact constructing spending, and so forth will all have a dampening effect on the economy.

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  • $\begingroup$ Very interesting unemployment data. $\endgroup$
    – AKdemy
    Aug 5, 2022 at 16:47
  • $\begingroup$ Also, US GDP is up in the 3rd quarter. $\endgroup$
    – AKdemy
    Oct 29, 2022 at 21:59
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Yes all history up until now. Generally speaking the definition of recession as 2 consecutive quarters of declining GDP was never officially accepted as the definition or recession.

Recession in economics is rather defined generally more vaguely as (see Blanchard et al macroeconomics an European perspective):

a period of negative GDP growth.

Now, usually in research papers this definition is made operational by defining the recession as two consecutive quarters of negative GDP growth (in fact even the textbook above will mention that after the definition of recession). This is because otherwise periods that are clearly not recessions would show up as one if there was temporary transitory drop in output. However this was not part of the definition of recession in economics, it was just a practical convention in research since the actual definition (a period of negative GDP growth) is vague as to how long the decline has to be and using it to refer to any period of negative growth turned out to not be very practical. You will find people who prefer to define it in terms of more than 6 months, I have seen works that defined it in terms of being longer than 4 months. Moreover, some definitions require GDP to fall below certain threshold (e.g. GDP must fall at least by 0.5% or something like that).

For example, NBER which is non-partisan research organization defines recession as:

A recession is the period between a peak of economic activity and its subsequent trough, or lowest point. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief. ... The NBER's definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. In our interpretation of this definition, we treat the three criteria—depth, diffusion, and duration—as somewhat interchangeable. That is, while each criterion needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.

So NBER definition for example does not use 2 quarters but 'few months' and the decline has to be 'significant' and it also have to be 'widespread'.

Many people in research also use the NBER definition and their dating of the recessions as NBER is quite influential in the profession.

This being said large number of economist also prefer to use the two consecutive quarters of fall in GDP as it is more 'objective'. But this was never a generally accepted and widely recognized definition. It always was a convention like in statistical testing where most scientists agree p-value below 0.05 designates 'statistically significant' finding, but that was always just convention, in physics 0.05 would not be threshold for significance. In the same way if you would do a poll of all research probably the most popular definition would be 2 consecutive quarters of decline in GDP, but you would find myriad of other definitions.

Taylor has excellent blog on this issue [emphasis mine]:

The definition of a “recession” is not a physical constant like the boiling point of water. It is quite common to define a recession as “two quarters of negative GDP growth.” But there is actually no US-government approved definition of “recession.” In the US context, the most commonly used recession dating are determined by an group of academic economists calling under the auspices of the National Bureau of Economic Research.

Although US business cycle dates have been based on NBER researcher for a long time, going back to the Great Depression, an organized NBER Business Cycle Dating committee wasn’t formed until 1978. It is not authorized by law. In fact, the lack of an official definition is probably a good thing, because it’s good to keep economic statistics out of the hands of politicians, and the there are obvious political implications to pronouncing on the dates when a recession has started, is ongoing, or has stopped. As on recent example, if a “recession” was strictly defined as a decline of two quarters in GDP growth, then the Trump administration would have been justified in saying that the US economy did not have a pandemic “recession” at all.

This being said I would not say that the definition of 2 consecutive quarters is a myth as it is used by many economists. Rather, the myth is that it is the definition of recession, whereas that is rather just the most common way how to operationalize the more impractical definition of recession as period of negative GDP growth.

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    $\begingroup$ This is interesting and super detailed, but it does not seem to provide an actual example of two consecutive quarters of negative GDP growth that some reasonable authority did not classify as a recession. Text in italics not explicitly specified by OP, it is my assumption that they expect something similar. $\endgroup$
    – Giskard
    Jul 26, 2022 at 14:42
  • $\begingroup$ Thanks, I am well aware of the definition, but I am particularly curious whether there was an instance when two consecutive quarters of GDP decline wasn't classified as recession. $\endgroup$
    – Matt Frank
    Jul 27, 2022 at 0:11
  • $\begingroup$ @MattFrank what exactly you mean by that? In US the most authoritative source is NBER and they never classified recession as 2 consecutive quarters. If you ask if there ever was time that not even a single person classified recession as 2 consecutive quarters then probably there never was such time but you could say that about any definition of recession, there might be some person somewhere defining it even as a single minute of negative growth $\endgroup$
    – 1muflon1
    Jul 27, 2022 at 0:29
  • $\begingroup$ @MattFrank as explained in my answer there is no definition of recession accepted by all economists, so always there are sources that say 2 consecutive decline in GDP are not recession, but on other side there are always sources that say it is $\endgroup$
    – 1muflon1
    Jul 27, 2022 at 0:32
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    $\begingroup$ @1muflon1 They are asking for an instance, as in literal two quarters, like 1902 Q2-Q3. $\endgroup$
    – Giskard
    Jul 27, 2022 at 3:30
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love how you never got a clear answer, just explanations around the subject, everybody here is aware it doesn't classify a recession, but has there ever been another occurrence where a similar incident happened? I think the answer is no. This will be a first, they're going to try to call it something else, but between you and me, we both know it was a recession, employment doesn't magically take you out of a recession. The US simply got ahead of itself, all thanks to central banks, the over stimulus, and the late response to inflation. We tried boasting a bigger GDP then we could actually carry. And boom, recession. It happens, blame central banks for acting so childish to begin with. Sorry again getting political. Just understand all this overstimulating continues decimating the middle class. A lucky few make it big with solid investments, another unlucky bunch get thrown into the lower class. Middle class has only been shrinking since the Fed started stimulating in the 80's. It just over accelerates an economy, making the poor poorer, and the rich richer. Blame the fed for whatever is going on.

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