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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!

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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.

One of the most remarkable developments that few seem to appreciate is that the U.S. business cycle has become flatter and longer. There may be numerous contributing factors, such as better inventory management, flexibility of the

capital markets and the increasing importance of the service

sector. The U.S. economy has experienced five quarters of negative growth in the past 17 years, and seven quarters of negative growth in the past quarter-century.

There are two main culprits the market often cites as causes for economic downturns. First are external developments, such as the oil shocks in the 1970s or the first Gulf War in the early 1990s. The second is the

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Federal Reserve

. Both seem exaggerated.

Sure, external variables can tip the economy over, but only, it seems, if it is already vulnerable. Look at the oil shock of recent years. Pundits have proclaimed every $10-a-barrel increase over $40 economically intolerable. But if the U.S. economy expanded by 1.5% in the fourth quarter of 2007, which seems like a reasonable conservative estimate, that would place second-half growth in 2007 at an impressive 3.2% pace, a pace that most industrialized countries would envy.

The

Federal Reserve

is also often cited, especially in some political quarters, as responsible for economic downturns by setting

monetary policy too tight for too long. When he was much younger and under the influence of Ayn Rand, former Federal Reserve Chairman Alan Greenspan seemed sympathetic to such a view.

Yet the historical record suggests otherwise. That is to say the business cycle existed long before the Federal Reserve was created in 1913. As noted above, the amplitude of the business cycle has been reduced, and the durations of the business cycle have increased.

This raises the issue of the business cycle itself.

There is one camp that argues that the seeds for an economic downturn are planted during the expansionary phase. Another camp says that the end of the business cycle is due to factors outside the business cycle. There has been much ink spilled in defense and criticism of each camp. Suffice it to say that business cycles are like people -- they can die of old age and not just be murdered.

The issue of defining a recession is not simply academic -- there are important policy and investment implications. For example, over the last several cycles, it has taken the real fed funds rate (fed funds adjusted for inflation) near zero to reinvigorate the economy. Also, past economic downturns often have led to fiscal stimulus, beyond the usual countercyclical spending, like unemployment compensation.

On both counts, policy developments do not appear to be waiting for the NBER or two quarters of negative GDP. In recent days, the U.S. president and senior Democrats appear to be favoring a modest fiscal stimulus of, say, $50 billion to $100 billion. In addition, the 4.25% fed funds rate -- which is likely to fall to 3.75% at the end of the month -- contrasts to a 4.3% year-over-year rise in headline consumer prices in November. The December figures will be released at the end of the week, and the consensus calls for a 4.1% pace (and subjectively the risks look to be on the upside).

"Stagflation" is also a slippery word that seems to defy clear definitions. The generic meaning is sluggish growth coupled with price pressures, something that classical and neoclassical economists did not think possible. Yet the common precedent cited is the 1970s, when

inflation was in the double digits and unemployment was rising from about 6% on its way to almost 11% by the end of 1982.

Although some pundits are referring to current conditions as stagflation, this seems to exaggerate inflation and unemployment or the slowing of the U.S. economy. Moreover, it seems not to appreciate that the business cycle and the price cycle are not always (or even usually, arguably) in sync. As is well appreciated, prices tend to be sticky.

So is the U.S. in a recession or headed for a recession? Is it experiencing stagflation? Like beauty, the answer lies in the eyes of the beholder.

Why Cramer's Wrong About a Recession

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The politicians are already acting as if the recession is here, though this may also be a function of the electoral cycle as much as the business cycle. Although Federal Reserve Chairman Ben Bernanke validated market expectations that the fed funds rate will be cut by 50

basis points at the end of the month, with the real

fed funds rate staying below zero, he was clear that a recession was not the Fed's baseline forecast.

This column was originally published on

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Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback;

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