3 Better Ways to Measure a Recession

NEW YORK (MainStreet) — The U.S. economy has been out of a recession for more than two years, but for many Americans it feels as though we’re still stuck in it – and for good reason. Unemployment remains above 9%, foreclosure activity continues to increase and consumers still have more than $15,000 in household debt on average. But when it comes to determining whether we are in a recession, none of those factors matter anywhere near as much as the gross domestic product.

Strictly speaking, a recession is defined as two consecutive quarters of negative GDP growth, signaling that the economy is contracting, though the economic panel that determines the beginning and end of recessions, the National Bureau of Economic Research, also factors in real income, employment, industrial production and wholesale and retail sales to make a more timely and comprehensive decision.

By assigning so much weight to GDP as the primary factor, economists run the risk of labeling the economy one thing when the reality on the ground seems much different. Or to put it differently, by defining a recession primarily in terms of economic contraction and growth, rather than in more human terms, the word itself fails to capture the dire mood that much of the country associates it with.

“The synonym for ‘recession’ isn’t ‘bad times,’ it’s ‘shrinking economy’,” says Gary Burtless, a labor economist at the Brookings Institution. “That means declining output and rising unemployment.” Burtless points out that throughout the 1930s there were two cycles of business expansion as the U.S. economy grew at its fastest rate in history, yet Americans then and now describe this entire period as the Great Depression. “Even at the end of it, the unemployment rate was over 10%, so no one would say it was good times.”

To say, then, that the country is no longer in a recession seems to miss the point. Sure, that means the economy is growing again, which should in turn set the stage for the kind of fiscal conditions that eventually improve the lives of average consumers, but there could be months or years in between in which households continue to suffer financially. What we really want is a recession index that measures the “bad times,” as Burtless says, or the nation’s fiscal mood and level of “gloominess,” as another economist puts it.

MainStreet asked several economists to suggest three other metrics we might use to determine whether the nation’s economy is in bad times and gauge how far we have to go to get back to the good times.

Unemployment

Perhaps more than any other single factor, economists say the difference between good times and bad is measured by the difference in the number of unemployed Americans now compared with before the recession began.

“Many people are still out of work and haven’t regained any kind of employment since the recession began, which is probably a big factor in why people are saying it still feels like we’re in a recession,” says Paul Dales, U.S. economist at Capital Economics in Toronto.

At the moment, the unemployment rate is stuck at 9.1%, compared with 5% in December 2007 when the recession officially began. Dales says this fact highlights just how much growth is needed in the labor market before the country feels the bad economic times are over.

Alternatively, federal policy analyst Andrew Fieldhouse suggests taking this metric one step further by looking at Bureau of Labor Statistics data on the employment-population ratio. The data shows that roughly 3% less of the population was employed in August of this year than at the start of the recession, and 6% less than at peak employment in the beginning of the 2000s.

“This puts into context just how bad it’s been and shows just how much ground really has to be made up between 5% and 9% unemployment,” Fieldhouse says.
Income Levels

One of the major problems with measuring the health of the economy by how much it grows, economists say, is that this doesn’t tell us which portions of the population are benefiting from that growth and which are getting left behind. Indeed, as Fieldhouse points out, the economy did grow in spurts in the late 2000s, but it was mostly higher-income earners who enjoyed that growth, not the country as whole.

To paint a more accurate picture, the economists MainStreet spoke with suggest measuring the fiscal health of the country by looking at median wages or by breaking down the GDP by person to get a sense of how much each individual contributes to the economy on average and how it compares with previous years.

Sure enough, when looking at each of these metrics, it’s not hard to see why many Americans feel disillusioned with the state of the economy. A recent report from the U.S. Census Bureau found that median household income stood at $49,445 last year, a drop of 6% from the beginning of the recession and roughly on par with what Americans earned in 1996 with inflation factored in. Likewise, real GDP per capita was $46,884 last year, or about $500 less than it was in 2005.

The economy may be growing, but as these numbers show, Americans are stuck in the past.

GDP Gap

Rather than focus on the absolute GDP number that gets reported each quarter, Fieldhouse suggests focusing on a slightly more complex but ultimately more telling statistic: the GDP gap.

This data point is based on data from the Congressional Budget Office, which calculates what the level of economic production in the U.S. would be if we were running at full employment and full output, and compares this with our actual output. The difference is the GDP gap or output gap, showing just how deficient the economy is.

At the moment, that gap between what the country’s economy is producing and what it could produce stands at more than 6%, or roughly $1 trillion. The good times won’t truly begin until that gap closes.

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