Recession? Stagflation? Depends on the Definition

This column was originally published on RealMoney on Jan. 11, 2008 at 3:08 a.m. EDT. It's being republished (with two related videos from TheStreet.com TV) as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

The cottage industry that includes journalists and economists frequently comes up with post-hoc explanations for economic phenomena, using words and phrases that lose much of their original significance over time. Examples last year included "yen carry trades" and "risk aversion." Now the words "recession" and "stagflation" are being bandied about, with little effort to define the terms.

There does not appear to be a universally accepted definition of recession. In the U.S., the end of the business cycle was historically called a depression or crisis. In fact, it appears that the words "recession" and "depression" were largely interchangeable.

For example, among the earliest uses of the word "recession" to apply to the business cycle was in the Economist (1929), but after the devastation of the Great Depression in the 1930s, economists and politicians wanted to distinguish a temporary and relatively shallow decline in economic activity from the kind of collapse that was evident then.

Cramer: We're in a Recession!

A frequently cited definition of a recession is two consecutive quarters in which GDP contracts. There are many problems with such a definition. There are other variables that economists, policymakers and investors probably ought to take into account, such as employment. Also, quarterly data might not be sufficiently granular to detect short downturns in activity.

In the U.S., the official arbiter of recessions is the National Bureau of Economic Research. The NBER says a recession is a "significant decline in economic activity spread across the economy, lasting for more than a few months." It looks at a number of economic variables, such as employment, industrial output, real income and wholesale and retail sales. It dates the start of a recession at the peak of business activity and the end of the recession/beginning of the expansion when business activity bottoms. This helps explain why the NBER's dating of a recession takes place with large lags.