Consider first a country where the rule would yield excessively frequent “recessions.” In Japan, the population is shrinking, and productivity growth is far below what it used to be, so the country’s output growth has averaged only 1% per year in recent decades. As a result, even small fluctuations can turn GDP growth negative. The two-quarter rule would suggest that Japan had seven recessions between 1993 and 2015, or one every 3-4 years.
Now consider the opposite problem, when the two-quarter rule yields infrequent recessions. To be sure, much of Australia’s success can be attributed to its adoption of structural reforms since the 1980s, its openness to trade, and a switch to a floating exchange rate. Still, one reason why Australia’s GDP shows no downturns in the past 28 years is that the country’s population and labor force are growing substantially faster than those in the US and other advanced economies, especially in Europe and East Asia.
Similarly, China has not had a recession in 26 years (since 1993). Although its economy has of course performed outstandingly, it, too, suffered in the Great Recession. But even an eight-percentage-point decrease in GDP growth (from 14% in 2007 to 6% at one point in 2009) was not enough to cause China’s output to shrink. The reason, of course, is that its trend growth rate has been very high, owing to rapid productivity growth.
Assuming the current US expansion continues in July, it will break the record of ten years set in 1991-2001. But if the dates of American business cycles were determined by the rule that most other countries apply, the US recession of March to November 2001 would be erased. (It did not include two consecutive quarters of negative GDP growth, but rather two negative quarters separated by a positive one.) Under that interpretation, the US record, it seems, would instead be the 17-year expansion from the first quarter of 1991 to the fourth quarter of 2007. And the current recovery would still have a long way to go to top that.
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers.