The “R” word has been thrown around a lot lately. The old rule of thumb is that two consecutive quarters of “negative growth” (yeah, rather than say “contraction,” analysts use “negative growth” to make it sound less bad) is a recession. When did that happen last? The fourth quarter of 1990 and first quarter of 1991 were -3.0% and -2.0% respectively. During the last claimed recession in 2001, we did not have two consecutive negative quarters, but the third quarter of 2000 was -0.5% (after the stock market mini-crashes), the fourth quarter was +2.1%, but was followed by a first quarter of -0.5%, followed again by a positive quarter of +1.2%. Had it not been for the tragedy of 9/11, the third quarter GDP of -1.4% might not have happened. But three of five quarters were negative. The average growth for those quarters was actually positive, +0.2%. Since that last negative quarter, we have had 24 quarters of positive growth, averaging +2.8%, and ranging from +0.2% to +7.5%.

In looking at past recessions, the role of the Fed in creating them through monetary mismanagement is often cited, but it is very true that the Fed has been able to moderate the depth of recent downturns. For example, since the Volcker era of “get-tough” interest rates that stopped high inflation, ending about 1983, the worst quarter for GDP was -3.0% in 1990. In the 1970s and before, the variation was much greater as indicated in the chart below. The Fed became more active as a result of the Humphrey-Hawkins legislation of 1978. This gave Paul Volcker the ability to raise interest rates to dramatically high levels to regain price stability. The legislation has many flaws, but this has been a significant benefit of it.

How are recessions judged if the “two consecutive quarters” rule is not followed? It's generally done by assessing how badly employment and other factors falter. The National Bureau of Economic Research decides these questions, and only then on an historical basis. Although they look at a range of other factors, it must be stated that most European countries have consistently higher unemployment rates that would be considered recessionary and politically untenable in the U.S.