THE BASIS POINT

NBER: It’s Official, U.S. In Recession (analysis and Q&A)

The National Bureau of Economic Research declared today that the U.S. is in recession, saying that economic expansion that began in November 2001 reached its peak peak in December 2007 after 73 months (They said the previous expansion of the 1990s lasted 120 months). The NBER is the organization that officially calls a recession, and the most common definition of recession is two consecutive negative quarters of GDP growth. The NBER distanced itself from the ‘negative GDP’ definition in their Q&A (see below) by pointing out that its definition of recession includes the phrase “a significant decline in activity.”

While GDP hasn’t been negative for two straight quarters, it was negative in 4Q2007 and returned to being negative in 3Q2008 preliminary readings (latest GDP coverage). Also jobs weakness is an undeniable sign of “decline in activity.” The economy has lost 1.2m jobs through October, and lost jobs every month of 2008.

In February, Fed chairman Ben Bernanke said that recession declarations are “subjective” and often called “after the fact.” The NBER also says in its Q&A that they don’t forecast how long recessions will last. So there is just one remaining question that didn’t make it onto the NBER Q&A (to quote one of The Bobs from Office Space): “What would you say … you do here?”

NBER FAQ ON RECESSION DEFINITIONS & PROCESS

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER’s recession dating procedure?

A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. As an example, the last recession, in 2001, did not include two consecutive quarters of decline. As of the date of the committee’s meeting, the economy had not yet experienced two consecutive quarters of decline.

Q: Why doesn’t the committee accept the two-quarter definition?

A:  The committee’s procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP, but use a range of indicators. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in activity.”  Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates.  The differences between these two sets of estimates were particularly evident in 2007 and 2008.

Q: Isn’t a recession a period of diminished economic activity?

A: It’s more accurate to say that a recession—the way we use the word—is a period of diminishing activity rather than diminished activity.  We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough.  The time in between is a recession, a period when economic activity is contracting.  The following period is an expansion.  

Q: How do the movements of unemployment claims inform the Bureau’s thinking?

A: A bulge in jobless claims would appear to forecast declining employment and rising unemployment, but we do not use the initial claims numbers in our discussions, partly because there is a lot of week-to-week noise in the series.

Q: What about the unemployment rate?

A: Unemployment is generally a lagging indicator, particularly after the trough in economic activity determined by the NBER.  For instance, the unemployment rate peaked 15 months after the NBER trough month in the 1990-91 recession and 19 months after the NBER trough month in the 2001 recession. The unemployment rate (which the
committee does not use) tends to lag behind employment (which the committee does use) on account of variations in labor-force participation.

Q: Is the expansion of real GDP (as measured using the product-side
estimates) in the first quarter of 2008 consistent with the identification of a recession starting in December 2007?

A:  The committee considers a range of indicators
of economic activity, and many of them suggest declining activity in the first quarter of the current calendar year.  These include payroll employment and the income-side estimates of domestic production.

Q: In December 2007, was there a clear peak in economic activity or was there a flat period around that time?

A: The committee found that economic activity measured by production was close to flat from roughly September 2007 to roughly June 2008, while activity measured by employment reached a clear peak in December 2007. The committee judged that the weight of the
evidence suggested that the peak occurred in December 2007.

Q: Are there estimates of monthly real GDP?

A: Yes. Macroeconomic Advisers, a consulting firm, prepares estimates of monthly real GDP. Many of the ingredients of the quarterly GDP figures are published at a monthly frequency by the Bureau of Economic Analysis. Macroeconomic Advisers aggregates them, and then uses a statistical procedure to adjust the monthly estimates for each quarter to make them consistent with the Commerce Department’s official quarterly figure. The monthly GDP numbers are fairly noisy and are subject to considerable revision. Estimated monthly real GDP reached one peak in January 2008 and another, higher peak in June 2008.

Q: Has the committee ever changed a cycle date?

A: In the past, the NBER has made some small changes to cycle dates, most recently in 1975. No changes have occurred since 1978 when the Business Cycle Dating Committee was formed. The committee would change the date of a recent peak or trough if it
concluded that the date it had chosen was incorrect.

Q: Typically, how long after the beginning of a recession does the BCDC declare that a recession has started?

A: Anywhere from 6 to 18 months. The committee waits long enough so that the existence of a recession is not at all in doubt. It waits until it can assign an accurate date.

Q: When the BCDC says that the recession began in December, is there a specific date in December?

A: The committee identifies the month when the peak occurred, without taking a stand on the date in the month. Thus, December 2007 is both the month when the recession began and the month when the expansion ended.

Q: Does the NBER identify depressions as well as recessions in its chronology?

A: The NBER does not separately identify depressions. The NBER business cycle chronology identifies the dates of peaks and troughs in economic activity. We refer to the period between a peak and a trough as a contraction or a recession, and the period between the trough and the peak as an expansion. The term depression is often used to refer to a particularly severe period of economic weakness. Some economists use it to refer only to the portion of these periods when economic activity is declining. The more common use, however, also encompasses the time until economic activity has returned to close to normal levels. The most recent
episode in the United States that is generally regarded as a depression occurred in the 1930s. The NBER
determined that the peak in economic activity occurred in August 1929, and the trough in March 1933. The NBER identified a second peak in May 1937 and a trough in June 1938. Both the contraction starting in 1929 and that starting in 1937 were very severe; the one starting in 1929 is widely acknowledged to have been the worst in U.S. history. According to the Bureau of Economic Analysis, real GDP declined 27 percent between 1929 and 1933, roughly ten times as much as in the worst postwar recession. If the term Great Depression is used to mean the period of exceptional decline in economic activity, it refers to the period from August 1929 to March 1933. If it is used to also include the period until economic activity had returned to approximately normal levels, most economists would judge that it ended sometime in 1940 or 1941. However, just as the NBER does
not define the term depression or identify depressions, there is no formal NBER definition or dating of the Great Depression.

Q: When did the NBER first establish its business cycle dates?

A: The NBER was founded in 1920, and published its first business cycle dates in 1929.

Q: When was your committee first formed?

A: When Martin Feldstein became president of the NBER in 1978. Robert Hall has chaired the committee since its inception.

Q: How is the committee’s membership determined?

A: The President of the NBER appoints the members, who include directors of the macro-related programs of the NBER plus other members with specialties in business-cycle research.

Q: How long does the committee expect the recession to last?

A: The committee does not forecast.

Editor’s note: Obviously joking with the Office Space comment. The NBER is important. But we do feel that market observers have the luxury of not being as accountable as market participants. Just look at that last question in their series.