Assessing the odds of a US recession

A SIMPLE exercise with Google Trends shows that web searches in the United States on the term “recession” jumped in 2022 and stretched beyond the levels of the last two economic downturns. Notwithstanding the aforementioned web popularity and social media buzz, there is no consensus on what constitutes a business cycle recession. The official definition of a recession in the US is actually “fundamentally different” than the mechanical rules of thumb in many other countries. Arguably, a global recession, though conceptually recognised as a detrimental event, can be technically deemed a hodgepodge.

The National Bureau of Economic Research Business Cycle Dating Committee (NBER BCDC) officially determines the peaks and troughs in the US economy. Essentially, the NBER BCDC fits the depth (ie, “significant decline”), diffusion (ie, “spread across the economy”) and duration (ie, “more than a few months”) criteria flexibly on selected indicators in each episode to subjectively gauge the occurrence of a recession, which is the “period between a peak of economic activity and its subsequent trough”. The NBER BCDC has hitherto announced the determination of economic peaks and troughs for the prior six episodes with a lag of almost 12 months on average (peak announcements occur sooner than trough). This is because the NBER aims to be definitive and exhaustive, not timely and ambiguous.

Although the NBER maintains a long business cycle chronology, a meaningful comparison of post-World War II with pre-War episodes is hindered by data limitations and methodological inconsistencies. But using post-War data per se, available research has shown that recessions have shortened and expansions have lengthened on average. More specifically, our analysis suggests that recessions, punctuated by diverse influences episodically, occur roughly 10 per cent to 15 per cent of the time on balance since 1945 (measured on a monthly frequency).