Are we in a recession?

Probably not.

But we're all hearing this hysteria in the media about it, mostly because it's an election year, and many of us having a stake in the housing market. Something big has happened, but it adds up to less than a recession.

A recession means at least six months straight of contraction in economic output. That's unlikely to happen soon and certainly has not happened in the last six months. But the "six month" definition is more of an accounting and political convention. A recession is better understood if you look at it as part of an economy's natural history.

Recessions mark the end of the standard seven-to-nine-year business cycle, which is a cycle of investment, growth of production, and (towards the end) major growth and changes in consumption. The current expansion started at the end of 2001. Recessions are preceded not only by drops in financial markets, but by contractions in investment caused by over-high interest rates. The end of a recession is signaled by lagging indicators, like falls in employment and consumption. Prices are flat or falling. Interest rates finally fall.

Within the standard business cycle are shorter inventory cycles, swings of oversupply and overdemand, lasting two to four years. What we're experiencing now is almost certainly an unusually severe, shorter-term bump like this, connected with the housing bubble and collapse. It's real enough: the housing and retail-consumer sectors have been noticeably hit. But the financial sector, while hurting in areas connected to housing, is not contracting as a whole. Other sectors of the economy, like technology, manufacturing, and especially raw materials and commodities, are doing well or very well. Many prices are still rising, and long-term interest rates have not changed much.

There have been other episodes like this. In late 1994, the US economy apparently contracted for one or two months, and there was a recession scare. The Fed reacted by easing credit, but then left that easing in place for too long, fueling the late 90s stock bubble. Even the 2001 recession lasted less than six months and so technically wasn't one. But it did feature economy-wide contraction, so it deserves the label anyway.

What's distinctive about recessions is not swings of supply and demand in a few economic sectors, but weakness across the whole economy all at once, lasting for the better part of a year or longer. What's happening at the moment doesn't sound like a recession. Another episode is a better analogy, the 1988 savings-and-loan-housing crash in New England and a few other parts of the country. It too was not a recession. But it did provide "coming attractions," foreshadowing the real recession of 1990-91, which featured the same weaknesses in the economy on a larger scale. It's far more likely that a recession is coming our way in 2009 or 2010.