Recession Started December 2007
The folks in charge of determining whether we’re in recession or not have now declared that we’ve been in one for a whole year, despite not meeting the technical definition.
The US economy has been in recession since December 2007, a panel of economists charged with the official designation of business cycles said Monday. The Business Cycle Dating Committee of the National Bureau of Economic Research said it made the determination during a conference call on Friday.
Although a recession is generally defined as two consecutive quarters of declining activity, the panel has its own criteria for determining a downturn. “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators,” the panel said. “A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.” The committee said it “identified December 2007 as the peak month, after determining that the subsequent decline in economic activity was large enough to qualify as a recession.”
According to government data, the US economy contracted at a 0.2 percent pace in the fourth quarter of 2007 but grew 0.8 percent in the first quarter and 2.8 percent in the second quarter of 2008. It then contracted 0.5 percent in the third quarter, based on a provisional estimate.
Now, it’s been the consensus of economists for some time that the economy is in a recession and things are pretty bad whether we call it “recession,” “depression,” or just “crappy.” But you’d think that a quantitatively oriented group like NBER could come up with a quantifiable measure for recession, preferably one that could be read at the time the data are released, instead of deciding it arbitrarily via phone chit-chat a year after the fact.
Or is that asking too much?
UPDATE: Kevin Drum reminds us that he predicted way back in February that, “When NBER eventually gets around to dating the 2008 recession, when will they decide it started? My money is on December 2007. And when will they date the end? I’d guess March 2009.”
Here’s hoping he’s as right on the second as the first.
Update (Steve Verdon): The NBER Dating Committee does not see its job as dating the start and end of a recession in a timely fashion as its job. Instead its job is to accurately date the start/end of a recession. As for the “generally accepted” definition of a recession that definition is only popular with journalists and not the NBER and has not been for at least 3 recessions now (i.e this goes back to the early 1990s). Seriously, if you are a journalist and you write on financial matters it would behoove you to get your act together and read about how the NBER dates recessions.
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.
Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.
The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then.
The committee believes that the two most reliable comprehensive estimates of aggregate domestic production are normally the quarterly estimate of real Gross Domestic Product and the quarterly estimate of real Gross Domestic Income, both produced by the Bureau of Economic Analysis. In concept, the two should be the same, because sales of products generate income for producers and workers equal to the value of the sales. However, because the measurement on the product and income sides proceeds somewhat independently, the two actual measures differ by a statistical discrepancy. The product-side estimates fell slightly in 2007Q4, rose slightly in 2008Q1, rose again in 2008Q2, and fell slightly in 2008Q3. The income-side estimates reached their peak in 2007Q3, fell slightly in 2007Q4 and 2008Q1, rose slightly in 2008Q2 to a level below its peak in 2007Q3, and fell again in 2008Q3. Thus, the currently available estimates of quarterly aggregate real domestic production do not speak clearly about the date of a peak in activity.
Other series considered by the committee—including real personal income less transfer payments, real manufacturing and wholesale-retail trade sales, industrial production, and employment estimates based on the household survey—all reached peaks between November 2007 and June 2008.
The committee determined that the decline in economic activity in 2008 met the standard for a recession, as set forth in the second paragraph of this document. All evidence other than the ambiguous movements of the quarterly product-side measure of domestic production confirmed that conclusion. Many of these indicators, including monthly data on the largest component of GDP, consumption, have declined sharply in recent months.
In short if we were to go with the “generally accepted” definition we’d still NOT be in a recession, yet everyone has considred the economy to be in recession for the past several months if not longer. In fact, the 2001 recession wouldn’t have fit that definition either.
Here is some additional information provided by the NBER on how it dates recessions,
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.
So is it surprising we are now “officially” in a recession? No. I noted a few weeks ago that payroll unemployment has declined every month in 2008 so far. Employment/unemployment tend to be lagging indicators. Thus, the recession probably started prior to 2008. I also linked to a post by James Hamilton about research that looked at the income side of economic activity (Gross Domestic Income) this should, by definition be equal to GDP, but rarely is. This difference is considered a “statistical discrepency”, however in looking at the GDI side we have had the “two quarters of economic decline” but not on the GDP side.