With recent unemployment and housing numbers getting better and the stock market gaining ground, its only reasonable to wonder if the recession is over. On a recent cover, Newsweek proclaimed that this is the case - while that may sell magazines, it doesn't necessarily make it fact.
Looking in the Rear View
The real answer to that question isn't as easy as it may sound. Historically, we really only know when the recession ended when it's already clearly in the past. Since it's not clearly in our past yet, and we are still in the stormy present looking at a foggy future, it's more complicated than we would like. (Understand more about the business cycle in Recession: What Does It Mean To Investors.)
The Technical Definition
Economics text books define a recession as two quarters of negative GDP. With the Bureau of Economic Analysis data showing the last four quarters being negative, there is no doubt that the technical definition was met. But since we don't have data for this next quarter, we don't know if we technically are out of it yet, and we need a quarter of positive growth to break this string of negative numbers. That may be happening now, but the third quarter doesn't end until October begins. If that happens, the fog would technically clear, and it could be said that the recession is over.
A Broader Definition
According to The National Bureau of Economic Research, 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 that definition, we had a recession for sure, and when these numbers rebound, we can say the recession ended. But exactly when the recession ends depends on the definition of a "significant decline." The fog won't clear with this definition until hindsight provides a clear picture of what happened and a group of economists agree that it ended. (Read about one of the "rock star" economists in Giants Of Finance: John Maynard Keynes.)
Economists, financial experts and pundits of various backgrounds are clamoring to jump on the "recession is over" bandwagon. They latch onto economic data and projected forecasts to make the case that the U.S. has emerged from the recession and is now in a state of recovery, but often ignore other data and evidence that doesn't support their position. Are they being objective or just hopeful, and can the correct measurement of when the recession is over simply be because someone says it is? Projections from pundits aren't evidence that answer real questions - although they make for lively talk show banter. (Learn how government actions may have contributed to The Great Depression in What Caused The Great Depression?.)
A Better Question to Ask
Instead of asking if the recession is over, why not ask if the rebound has started? This is more important to those who are facing economic strife and are more relevant to financial decision making going forward. Sure, the recession might be over, but if the situation doesn't improve, only a few will care that the recession ended by some technical or opinion-based definition. It's likely that history will show that the recession ended during this time period. But for everyone else, especially those trying to make house payments with one unemployed spouse, little solace is provided. If you can't find a job, can't make your house payment and are still late on the bills every month, the economy still stinks. The rest is just semantics. Many people think that, "When I can get a job, pay my bills on time, stop borrowing on my credit card, and start thinking about a solid financial future again, the recession is over," and it's hard to argue with that definition. (Take a look at the biggest economic declines since The Great Depression in A Review Of Past Recessions.)
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