What is a Recession?

In the 1970’s Alfred Khan, an economist who was responsible for fighting inflation during the Carter administration, used the word “banana” as a substitute for “recession” when speaking to the press. His reasoning was that it made people nervous when he used the word “recession.” Apparently, he later switched to “kumquat” when a banana company complained. He was a funny guy.

We seem to be at a similar moment in history. First, let’s get the definitional argument out of the way. The National Bureau of Economic Research (NBER) uses a variety of factors to say whether the economy is in recession. Two consecutive quarters of negative GDP growth are among those criteria, but there are others. But to be honest, lots of people use the two quarter decline in GDP as a marker for a recession and you wont find many historical periods which had two such quarters that are not now considered to have been in a recession.

So what is the big deal?

Folks who root for the Democratic Party are reluctant to have the word “recession” associated with the Biden administration. Folks who cheer for the Republican Party are eager to tar the Biden administration with the term. The argument is pointless. The fact is the economy is slowing down and two quarters of negative GDP growth are a good marker for that.

Is a slow down bad thing?

In my opinion, a slow down is actually exactly what we need. More than a decade of loose monetary policy accompanied by aggressive fiscal stimulus, supply chain problems, and war have created the worst inflation in 40 years. The Federal Reserve needs to bring that inflation under control quickly before inflationary expectations become ingrained. That means higher interest rates with reduced demand for housing, cars, and capital investment. All of those mean a much cooler labor market. In the context of accelerating inflation these are good and necessary things. Ideally the slow down will be mild and brief, but make no mistake it is necessary.

What Should We Call the Current Phase in the Economy?

If it makes you happy you can call it a recession. If you prefer you can call it a temporary slow down (crossing your fingers and hoping for the best). Or you can follow Alfred Kahn’s lead and call it a “banana” or a “kumquat.” Whatever you call it remember it is not, necessarily, a bad thing.