Most sensible economists agree the U.S. economy is in recession. Yet the fact remains that no recession has been officially declared.
The textbook definition of recession is two successive quarters of contraction. After posting very strong growth during the second and third quarters of 2007, GDP fell 0.2% during the fourth quarter of that year. However, it rebounded to 0.9% growth in the first quarter of 2008. The tax rebate checks, billed as an economic stimulus plan, boosted second quarter 2008 GDP to 2.8%. GDP fell 0.3% in the third quarter. So if the economy contracts during the fourth quarter, which it certainly will, we will have satisfied the textbook definition of recession.
The more relevant definition, however, is the one stated by the National Bureau of Economic Research. This is the entity that has the authority to declare official recessions in the U.S. According to the NBER, "a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." By this definition, it appears that a case could be made that we have been in recession for almost a year.
The NBER takes its time in declaring recessions. According to the NBER, the last recession began in March 2001 and ended in November of that year. But the NBER did not declare the start of the recession until November, when the recession was already over. Furthermore, it did not declare the end of the recession until July 2003. That's almost two years after the recession had already ended.
Employment is one of the many factors the NBER studies when trying to determine if the economy is in recession. In December 2006, the unemployment rate stood at 4.6%. One year later, it had climbed to 5.0%. After dipping a bit in January and February of 2008, it resumed its upward drift. The unemployment rate for October hit 6.5%, 150 basis points higher than it was just 10 months earlier. The last time the unemployment rate visited this level was in April 1994.
Given layoffs like the one announced yesterday by Citigroup, there is no doubt unemployment will jump to much higher levels. Some economists hope the unemployment rate will peak around 7%. I think this forecast is much too optimistic. In June 1992, the unemployment rate hit 7.8%. In November and December of 1982 it peaked at 10.8%. Furthermore, it is not unusual for the unemployment rate to continue rising for some time even after a recession has ended. This is because employers are wary about hiring until they are convinced that better times lie ahead. At this time, I am expecting the unemployment rate to rise to somewhere between 8-9% by June 2009.
I believe the current (undeclared) recession began in January 2008. I am optimistic that it will end around June 2009. If I have the starting and ending points right, this recession will have lasted 18 months in duration. That is about the average length of all recessions recorded in the U.S. since 1854, but it is 10 months longer than the average since 1945. In fact, 18 months would set a post-WWII recession record.
Of course, if businesses become more aggressive with layoffs, retail sales continue to fall, and housing prices fail to stabilize by next spring, this recession could last considerably longer than 18 months. That would be a dire outcome indeed.