The "Triple P" rule is emerging as a nuanced tool for assessing potential economic recessions, developed by Gregory Daco, the chief economist at EY Parthenon. This rule stands for "profound, pervasive, and persistent contraction" and seeks to offer a comprehensive approach to identifying economic downturns. The concept of a recession traditionally hinges on consecutive quarters of declining real GDP, but Daco's model introduces a broader perspective. According to Daco, the economy must experience a significant, widespread, and lasting decline to qualify as a recession.
The National Bureau of Economic Research (NBER) plays a pivotal role in officially designating recessions in the U.S. economy. The NBER's Business Cycle Dating Committee is tasked with identifying peaks, troughs, expansions, and contractions within the business cycle. This committee employs three primary criteria to define a recession: depth, diffusion, and duration. Each of these criteria provides insight into the severity, reach, and length of an economic contraction.
The Criteria for Declaring a Recession
Depth refers to the intensity of the economic downturn. It evaluates how severe the contraction is, providing a measure of how deeply the economy is affected. Diffusion assesses how widespread the economic decline is across various sectors or regions. This ensures that a recession is not limited to one isolated area but instead impacts multiple facets of the economy. Duration is concerned with how long the contraction lasts. A recession is not considered merely a short-lived dip but rather an extended period of economic decline.
The timing of recession declarations can be contentious, as the U.S. economy could already be in a recession before the NBER officially recognizes it. This delay stems from the necessity of gathering sufficient data to meet the depth, diffusion, and duration criteria.
The "Triple P" Rule: A Broader Perspective
Daco's "Triple P" rule complements these traditional measures by emphasizing a more holistic view. It requires that a recession be profound, pervasive, and persistent. This approach aligns with the NBER's criteria but offers additional nuance.
“It can’t just be a blip in economic activity,” – Daco
Profundity insists on a deep contraction in economic metrics. Pervasiveness demands that this contraction spans multiple sectors and regions within the economy.
“It has to be pervasive in that it can’t just be one sector or one weak region of the economy. It has to be across sectors and across regions of the country, and it has to last.” – Daco
Persistence denotes that this decline is not ephemeral but sustained over time. While not an official recession indicator, the "Triple P" rule serves as a valuable tool for economists like Daco to monitor economic health. It acts as a warning sign rather than a definitive predictor of an economic downturn.
Current Economic Climate and Recession Concerns
Presently, there is no immediate indication of an impending recession in the U.S., according to Daco. However, certain signs suggest a cooling off in private sector activity.
“We’re not seeing any indication that there is an imminent recession, but we are seeing signs that private sector activity is cooling,” – Daco
Daco notes slower momentum in the labor market and more cautious consumer spending. Businesses are taking a "wait-and-see" approach amid policy-related uncertainties, particularly concerning trade policies.
“We’re seeing slower labor market momentum. We’re seeing consumers spending with more caution. We’re seeing businesses adopting a bit of a wait-and-see approach, and we have a lot of uncertainty and a lot of downside risks from the policies — in particular, the trade policies that are being implemented.” – Daco
Despite these factors, Daco emphasizes that there is no immediate cause for alarm regarding a recession.
“There isn’t necessarily a reason to be extremely concerned about an imminent recession, because we’re coming out of two very strong years of growth,” – Daco
He highlights recent years characterized by robust income growth, strong productivity gains, and solid consumer spending.
“an environment where income growth was strong, where productivity growth was strong, where consumer spending growth is strong and, really, where the economy overall was quite strong.” – Daco
Daco also advises caution when interpreting GDP contractions since they can arise from various sources, including shifts in import patterns.
“We have to be careful with that definition,” – Gregory Daco
“a contraction in GDP can come from multiple sources, including, as may be the case in the first quarter (of this year), from an environment where you have a surge in imports.” – Gregory Daco