In the New York Times September 14, 2018, in an article “We’re Measuring The Economy All Wrong,” the writer of the article David Leonhardt complains that despite strong gross domestic product (GDP) data most people don’t feel it. The writer of the article argues that,

The trouble is that a handful of statistics dominate the public conversation about the economy despite the fact that they provide a misleading portrait of people’s lives. Even worse, the statistics have become more misleading over time.

According to the accepted rule of thumb, recessions are about at least two quarters of negative growth in real gross domestic product (GDP). Recessions, according to this way of thinking, are seen as something associated with the so-called strength of the economy. The stronger an economy is the less likely it is to fall into a recession. The major cause of recessions is seen as various shocks, such as a sharp increase in the price of oil or some disruptive political events, or natural disasters or a sudden fall in consumer outlays on goods and services. Obviously then, if an economy is strong enough to cope with these shocks then recessions can be prevented, or at least made less painful. For instance, a well-managed company with a well-managed inventory is likely to withstand the effects of various shocks versus a poorly managed company.

Severity of a recession and the strength of the economy

We suggest that recessions are not about two quarters of negative growth in real GDP or declines in various economic indicators as such. They are also not about successful inventory management. We would suggest that recessions are not about how resilient an economy is to various external and internal shocks.

A recession is about the liquidation of various activities that spring up on the back of the previous loose monetary policies of the central bank. A loose central-bank monetary policy sets in motion a diversion of real wealth from wealth generating activities to non-wealth generating activities. In the process, this diversion weakens wealth generators and this, in turn, weakens their ability to grow the overall pool of real wealth.

The expansion in the activities that spring up on the back of loose monetary policy is what an economic boom, or false economic prosperity, is all about. Note that once the central bank’s pace of monetary pumping has strengthened, irrespective of how strong and big a particular economy is the pace of the diversion of real wealth is going to strengthen.

Once, however, the central bank tightens its monetary stance this slows down the diversion of real wealth from wealth producers to non-wealth producers. Since activities that sprang up on the back of the previous loose monetary policy cannot now generate an adequate amount of real wealth to remain viable, they fall into trouble. (These activities can only survive by means of the diversion of real wealth from wealth generating activities).