How Will We Know When We Are in a Recession?

November 6, 2019

One of the tricky things about an economic recession is recognizing when one begins. Real-time economic data can be hard to draw conclusions from, and what looks like a trend can be a temporary blip. Confirmation usually comes from lagging economic indicators, and by the time this data is collected, we can be months into a recession.

Now, economists at the Federal Reserve have developed a new rule to more quickly identify when a recession begins. The rule is based on tracking changes to the unemployment rates. It would have accurately predicted every recession since the 1970s within two to four months of when it began. This would allow the Fed to act more quickly to correct economic trends.

Take the most recent recession. In January 2008, the Fed was worried that we were heading into a recession, putting the odds at 45 percent that we would enter a recession in the next six months. Economic data shows that at this point, we were already one month into the recession. In fact, an official determination that a recession had begun wouldn’t be made until late 2008, almost a full year after it started. This new rule will make corrective action easier to take and may lessen the impact and duration of future recessions.

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