The National Bureau of Economic Research yesterday announced that its Business Cycle Dating Committee had officially determined a peak in economic activity at December 2007, which signals the start of the recession. I am a member of the committee. Though I speak only for myself, not the committee, I offer my views on two questions of possible interest:
- Who needs the NBER Business Cycle Dating Committee (BCDC) anyway?
- Why did we pick December 2007 as the starting month of the recession?
(1) We sometimes hear the question “Who needs the NBER Committee anyway?” This question most often comes in one of two forms:
(1a) Everyone in the real world has known that the economy has been in a recession for some time. In past cycles, media reports have sometimes taken the line “Ivy Tower Eggheads Finally Figure Out What Everybody Else Has Known All Along.” The implicit critique is that the committee takes too long after the event – typically almost a year — to make its declaration. One short answer is that our job is to be definitive, authoritative, but not fast. We don’t want to have to revise our dating of the peaks and troughs later, in part because it would sow confusion among those who rely on them (from econometric researchers to political speechwriters). GDP and other official statistics are often revised after the fact, for example. We leave it to others –pundits, forecasters, consulting companies, financial newsletters, and so on – to try to get there first. We deliberately get there last.
(1b) The other form taken by the question “Who needs the NBER committee?” runs as follows: “The rule of thumb is simple: two consecutive negative quarters of GDP growth. Why complicate things?” The Frequently Asked Questions segment of the BCDC announcement answers this in detail. For now, observe simply that questions (1a) and (1b) are inconsistent with each other. As of December 1, 2008, the US economy has not yet experienced two consecutive negative quarters. So an argument that we should wait for two consecutive quarters (critique 1b) is the opposite of the critique that we should have acknowledged a recession before now (critique 1a).
(2) The more important question is: Why did we pick December 2007 as the start of the recession? As is the case surprisingly often, different economic indicators give very different answers to the date of the peak.
Of the monthly indicators to which the BCDC gives primary attention, the most important is jobs, more specifically Payroll Employment (from the Labor Department’s Bureau of Labor Statistics). It peaked in December 2007, and has been declining ever since. My personal favorite indicator is Total Hours Worked (which is closely related, because it is number of people employed times the average number of hours per worker). Hours Worked also peaked in December, as shown in the graph below.
Of the quarterly indicators, the most important is aggregate economic activity, more specifically, Output. The Commerce Department’s Bureau of Economic Analysis computes two measures of output: Gross Domestic Product (GDP) and Gross National Income (GNI). The two should be the same in theory, but differ in practice due to measurement errors. GDP receives far more public attention – in part because its advance estimate comes out first — but in fact has no claim to be a more accurate measure of output than does National Income.
The statistics currently available show that GNI peaked in Quarter 3 of 2007, whereas GDP peaked in Quarter 2 of 2008. A simple-minded average of the two peak dates would seem to point to midnight of New Year’s Eve, December 2007, as the peak. Another (comparably unsatisfactory) way of forcing the output data to cough up a precise month is to look at Personal Income, which is available monthly. The BCDC’s computed measure of real personal income less transfers peaked in December 2007.
It would be wrong to claim that all roads arrive at the same destination, December 2007. Other indicators point to other dates, some earlier, some later. If we are very lucky, revisions that the BEA makes in July 2009 will help resolve the discrepancy between the GDP and GDI measures somewhere in the middle. But perhaps the best characterization of the output measures is that they show a rough plateau from the fall of 2007 to the summer of 2008. That the employment statistics speak more clearly allows them to have the predominant say.
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This article has 6 comments:
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The hand
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774 Comments
My Website
Dec 02 04:43 AMon 01 december 2008 the nber called a recession 12 months it started. there was no new data for them to see that was not available many months ago. here is some examples of the peak month of various indicators which NBER use to determine a recession:
Real Manufacturing sales: June 2007
Real Wholesale-Retail trade sales: September 2007
Real Income: October 2007
Employment: December 2007
Industrial Production: January 2008
this is one case where the NBER made a mistake. we had a slight economic recovery between march 2008 and june 2008 - although this recovery did not reach the previous peak. the real economic downturn did not happen until july 2009.
just one more look at gdp numbers to illustrate my point:
2007q3 6.3% 4.8%
2007q4 2.3% -0.2%
2008q1 3.5% 0.9%
2008q2 4.1% 2.8%
2008q3 3.6% -0.5%
the second column is gdp growth in percent, while the third column is gdp growth expressed in the year 2000 chained dollars (source BEA).
another way to look at this is that we had a one quarter recession, two quarters of recovery, and then beginning in the third quarter of 2008 the recession kicked in.
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mangy cat
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46 Comments
My Website
Dec 02 06:46 AMafter sell on the rumour (and the market has sold big time), buy on the news
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BrunoT
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70 Comments
Dec 02 11:00 AM-
StephanieInCA
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1 Comment
Dec 02 01:11 PM-
jegan ;-)
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764 Comments
Dec 02 01:31 PMAlso reminds me of the study conducted many years ago at some horrendous cost ($25 Million, I believe) on 'why children fall off bicycles'. The outcome of the study was that children would lose their balance and fall over.
Barnum was right, there truly is a sucker born every minute.
jegan
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John Lounsbury
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616 Comments
My Website
Dec 03 12:55 AMThanks for your detailed explaination of the nber process.
The Hand - - -
You make some good points backed by excellent data. I would pose one question, based on a simile comparing a recession to a flood:
If you are to designate the start of a flood, does it begin when the water reaches your ankles or when it goes over your head?
Obviously, the flood is evident when the water goes over your head. I would maintain, however, that you can not designate the start of the flood until a flood is evident - that point in time you go under (or shortly before you actually go under). It is only then that you can look back and designate the start of the flood at the point the water started to rise. There may be many occurences of water over the ankles when the water recedes and no flood follows. So declaring the start of a flood requires that it be proven a flood is occurring (has occurred).
Now let's complicate the simile. If the water rises over the ankles and then to the knees and then recedes back to the ankles, and then finally rises above the knees and continues on to over the head, didn't the flood start still start when the water first began to rise?
The situation you describe, Steve, is like the flood that had water rise and fall back somewhat before really becoming deep. Your argument is analogous to designating the start of the flood when the water is much deeper than is the case with the nber process. The nber process looks back after the deep water is confirmed to define when the first rise in water occurred that was not interupted by a complete reversion to dry land.