Time to retire "recession"?

Posted by: Paul Donovan

15 Nov 2019
  • Economists do not use the word "recession" very often. A search of past editions of economic journals (always a fun thing to do) shows this. "Recession" also means different things to different people. Broadly, "recession" means "significant downturn".
  • "Recession" tries to simplify a "significant downturn" into one number. This is why the idea of "two quarters’ negative growth" has become popular. It is simple to measure. It allows for dramatic headlines, when a second negative quarter happens or when it is "narrowly avoided". But for an economist, this idea is too simple to be useful.
  • The idea of "two quarters’ negative growth" does not suit the modern world. More and more countries face a drop in their population. That means GDP could fall and living standards could rise at the same time. A fall in GDP is not a significant downturn if less activity is spread over fewer people. Economic cycles may also be less violent in the future. Technology makes it easier for companies to be efficient when managing inventories. That should reduce how bad a downturn is. (It also makes recoveries less exciting.).
  • "Recession" makes for dramatic headlines. It makes for bad economics. It is time it was retired.