Are We in a Recession? Probably

Welcome to the recession. James Hamilton has a couple of posts on whether or not we are in a recession and the picture is grim. The first post looks at GDP and recessions. In that post Prof. Hamilton notes that gross domestic income, GDI, may be the better the predictor of recessions than GDP. He points to the work of Jeremy Nalewaik,

Federal Reserve economist Jeremy Nalewaik has several research papers ([1], [2]) arguing that GDI may be a more helpful series for recognizing recessions than is GDP. It is interesting that while GDP indicates sluggish growth over the last 3 quarters, GDI looks much more like a recession, with 2007:Q4-2008:Q1 satisfying the traditional rule of thumb of two quarters of falling real output.

Nalewaik also has a probability index for the economy being in a recession based on the GDI and it indicates that yes, we are in a recession. Prof. Hamilton also points to the rather disappointing employment numbers, which are a lagging indicator, as further evidence that the economy is in recession.

…it seems like a pretty clear call to me– the U.S. economy is currently in a recession which likely began in the fourth quarter of last year.

The second post looks at Personal Consumption Expenditures (PCE). Unlike GDP PCE is reported monthly and at this point we have the first two months of PCE for the next quarter This is the single largest component of GDP and over at Calculated Risk one can infer what the next quarters GDP will be based on the first two months of PCE data of that quarter. In this case the inference is that GDP in the third quarter will be negative. Another indicator that the economy is in recession.

Update: There is also this post on Prof. Edward Leamer’s 4 criteria for calling a recession. Unfortunately we meet all 4 criteria.

The idea of staving of a recession with this bailout of the financial market is pretty much dead now. It, at best, can be seen as a desperate attempt to prevent a severe contraction…well I don’t know…I’m not sure about the severe part of it.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. Brian says:

    A recession? Definitely. I had a guest professor who mentioned an upcoming depression. By the looks of the markets and the worldwide response there is no doubt one is on the way. Once gas prices go up again the economy will shed too many jobs. At least some choose to carpool to save money.

  2. Sere says:

    The oil bubble has burst. No recession in US. Do the math — do you even realize what every 10 buck drop in the price of a barrel does for the US consumer.

    Why is everyone missing this?

    The euro (another ludicrous bubble) is in *real* trouble however.–

  3. DL says:

    Well it should slow down the influx of illegals -that’s the pro. It wont slow down both candidates installing cap and trade GW financial destruction which will turn the recession into a depression -from which the marxists will be begged by the masses to save us!

  4. Steve Verdon says:


    Talk of a depression is…well letting one’s hysteria get the better of oneself. The recession could be bad, but I put a low probability on depression. We just know so much about what went wrong last time.

    Why is everyone missing this?

    Because the data is saying the economy is in recession.

  5. Alex Knapp says:


    I agree with you on the low likelihood of a depression. A recession, definitely, but unlike the Great Depression, where the Fed stampeded its way to a large deflation, I think that Bernakke is doing a lot of smart things. Don’t agree with all of them, but he’s far from the disastrous policies that led to the Great Depression…

  6. Wayne says:

    I get tired of people changing words definitions to suite their agenda. The 2nd quarter GDP was at 2.8%

    Are there parts of the economy that are hurting? Of course but there are always parts of the economy that are hurting even in the best of times. The stock markets of the world are chaotic at the moment. Will it translate into chaos on Main Street? I doubt it but only time will tell.

    Many of you remind me of the doom predictors or Nostradamus followers. They keep predicting doom and when they are right one out of a hundred times, they say “told you so”. Else they warp events or their predictions to fit their purposes. Steve has been predicting doom for years now. Is he right this time? I doubt it. We may or may not be heading into recession but we haven’t been in one these last couple years and it is a shame people keep repeating the lies that we have been.

  7. Michael says:

    In this case the inference is that GDP in the third quarter will be negative.

    That doesn’t sound right, did you mean the change in GDP will be negative?

  8. Bithead says:

    Why is everyone missing this?

    Well, not everyone. Still, you’re right in that quite a lot are.

    And teh reason’s simple enough. It’s hard to prech gloom and doom you can blame on those nasty Republicans, if you admit there’s anything even resembling a bright spot.

  9. Michael says:

    And teh reason’s simple enough. It’s hard to prech gloom and doom you can blame on those nasty Republicans, if you admit there’s anything even resembling a bright spot.

    I see someone bought the “nation of whiners” talking point. You might be the only one though.

  10. Steve Verdon says:

    Steve has been predicting doom for years now. Is he right this time? I doubt it.

    The economy has been weakening for quite sometime. Now the data is looking rather bad. Unemployment, up. GDP, still positive, vut GDI is looking bad. Why is this significant? Idealy,

    GDI = GDP.

    It doesn’t because we get GDI and GDP data from different sources, the difference is logged to “statistical discrepency”. But GDI isn’t looking too good. PCE is declining, and that is over 70% of GDP. Then we have civilian employment droped over 0.5% in the past 6 months. The 6 month growth rate in non-farm payrolls is down is down 0.4%. Even extending it to 12 months the growth rate is still negative. And the 6 month change in industrial production is off by 1.7%.

    All people like Bithead, Wayne, et. al. have to hang their hat on is the statisical discrepancy in the GDP vs. the GDI.

    Partisanship much?

    Micheal, yeah sorry my goof, the growth rate willb be negative.