Recession dating, as much art as science, but its official, the U.S. is in a recession

December 2, 5:16 PMEconomic Policy ExaminerJoseph Hight

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So the National Bureau of Economic Research makes it official.  The NBER announced yesterday that the United States has been in a recession since December 2007.

But a Merrill Lynch economist made almost the same call in January 2008.

David Rosenberg, Merrill Lynch's chief North American economist, said in early January 2008 that a jump in the U.S. jobless rate to a two-year high of five per cent in December 2007 — "strongly suggests that an official recession has arrived."

There is no such thing as an “official recession.” But that’s OK.  Rosenberg did make an early call, though he hedged a bit.
No government agency officially designates when the U.S. is in a recession.  But the nonprofit NBER has been dating recessions since 1929, and has generally become accepted as “officially certifying that a recession has begun.”

But having this task of officially designating the beginning of a recession makes NBER cautious before making an announcement.  When Rosenberg came out with his statement, Martin Feldstein, President of NBER dissented, and said,

"I think we're not in a recession now," while adding there is a "serious risk" of a downturn and the odds of a U.S. recession were now greater than 50 per cent.

Almost a year later, we see that NBER now says we were indeed in a recession.

Just as there is no official designation of a U.S. recession, other than NBER’s, there is no official definition of a recession.

One short cut definition used by many financial writers and even some economists, at times, is that a recession occurs when U.S. gross domestic product – a measure of total output of the U.S. economy – declines for two consecutive calendar quarters.

For example Bloomberg.com defines a recession as “A temporary downturn in economic activity, usually indicated by two consecutive quarters of a falling GDP.”

And business dictionary.com defines it as a

“Period of general economic decline, defined usually as a contraction in the GDP for six months (two consecutive quarters) or longer. Marked by high unemployment, stagnant wages, and fall in retail sales, a recession generally does not last longer than one year and is much milder than a depression. Although recessions are considered a normal part of a capitalist economy, there is no unanimity of economists on its causes.”

But NBER does not use the two calendar quarters definition for its recession dating.  When asked why, NBER says

“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.”

GDI refers to gross domestic income as opposed to gross domestic product.  Because the costs of producing product become payments to those who help produce the product, the two are theoretically equal.  But these are estimates based on statistical data, and they don’t always come out equal in the measurement. And that is what happened at the end of 2007 and the beginning of 2008.

Here is what NBER said in the announcement of a recession beginning in December 2007,

“The committee noted that the behavior of the quarterly estimates of aggregate production was not inconsistent with a peak in late 2007. The income-side estimate of output reached its peak in the third quarter of 2007. The product-side estimate reached a temporary peak in the same quarter, but rose to a higher level in the second quarter of 2008.”

In other words GDP did not fall for two consecutive quarters at the end of 2007 and the beginning of 2008, and there was conflicting movement in measured GDI.

In addition to GDP and GDI, the NBER considers a number of data series in calling the beginning of a U.S. recession, including, payroll employment, personal income, and industrial production.

 But the NBER has no set way of weighing each of these factors.  Instead, it considers all of them, and NBER’s Business Cycle Dating Committee makes a consensus call.

Here is what Committee said in its decision:
 
“The committee determined that the peak quarter of economic activity was the fourth quarter of 2007. When the monthly peak occurs in the last month of a quarter, the NBER’s long-standing procedures dates the quarterly peak either in the quarter containing the monthly peak or in the subsequent quarter. Thus, the committee could have dated the quarterly peak in 2008Q1 if it had determined that economic activity was higher in that quarter than in 2007Q4. However, the committee determined that this was not the case. Most notably, both payroll employment and the income-side estimate of domestic production were lower in 2008Q1 than in 2007Q4, and the product-side estimate of domestic production was only slightly higher. The committee found that the peak quarter was the one containing the peak month, 2007Q4.”

It’s as much art as science.
  

Click here for another view of the NBER recession announcement.