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Analysis

Every economist has his or her favorite statistics to monitor recessions. Some look at the number of new housing starts, others prefer the number of new orders for consumer goods, and still others have suggested that necktie sales are, amazingly enough, a reliable economic indicator. But the two most commonly cited statistics are the GDP (Gross Domestic Product) and the unemployment rate.

The GDP measures how many goods and services we are producing inside the United States. It estimates the value of all the of the cars we make, vacuums we repair, real estate transactions we negotiate, and babies we sit, throws them all into a big bucket and comes up with one huge number to measure all economic activity in the country. Obviously, if this number goes up, we are being more productive—the economy is growing. If the number remains flat or falls, we are producing less—the economy is not growing. Because economists like precision, they have decided that when the GDP does not grow for two or more consecutive quarters, we officially have a recession.

Chart showing US GDP in current and constant dollars from 1980

(source)

This graph tracks GDP since 1980.  In order to more accurately measure the actual
the value of the goods and services produced in growth of the economy, economists recalculate
the United States in “current dollars.” GDP in “constant dollars”—dollars whose value has not been altered by inflation.

The unemployment rate is, on the surface, a bit simpler. It measures the number of people who are unemployed—sort of. Actually, it only measures the jobless people who are actively seeking work. If a person is not actively seeking work (if they have given up trying to find a job or are unable to work because they are taking care of a sick family member) they are not included in the statistic. These “marginally attached” can add another point to the officially reported unemployment rate. Nor does the statistic count the “involuntary part-time” workers. These people who want full-time work but are forced by economic conditions to take part-time jobs can add another 5% to the reported statistic.

So an official unemployment rate of 6.5% means that closer to 12% of the workforce can’t find a full time job. Again, only sort of. Not every unemployed person is unemployed for the same reason. For example, some are actually between jobs, and some work in occupations that are seasonal. Therefore, economists tend to break “unemployment” into four sub-categories: cyclical, structural, seasonal, and frictional. And since a certain amount of unemployment is unavoidable—imagine a professional Santa who spends the offseason bulking up for the holidays—economists argue that “full employment” is about 5.5% unemployment. That is, since a certain number of people will always be temporarily put of work, 5.5% unemployment is about as good as it gets.

Comparing U-3 unemployment rate to U-6 rate

(source)

Why It Matters Today

Recessions matter today because we're in one.  Period.

The unemployment rate, which has now been hovering around 10% for months on end and is unlikely to decline sharply in the near future, is the worst in generations.  GDP has been flat.  

What's that got to do with you?

Looked for a summer job lately? Notice that lots of jobs that used to be filled by teen workers are now staffed by adults?  That's a recession for you.

Paid any attention to your state government's budget situation?  It may well be on the verge of going broke, which could huge cutbacks for your school, your parks, your roads and transit systems. That's a recession for you.

Sometimes, a Song Says it Better: Allentown, by Billy Joel

“Allentown” could be any formerly industrial town, where “they’re closing factories down.”

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