July 12, 2003

When Will the NBER Call the End of the Recession?

The Washington Post's John Berry gives a very interesting look: his take on the back-and-forth within the NBER's Business Cycle Dating Committee. As Berry interprets it, the NBER is moving away from its old methodology ("We use the common pattern shown by cyclical indicators to gauge the state of the business cycle. What are cyclical indicators? Cyclical indicators are those that are useful in gauging the state of the business cycle.") to one that will ultimately conclude that a recession is a six-month decline in estimates of seasonally-adjusted monthly real GDP.

I would prefer a shift to a three-part classification: recession, expansion, and employment stagnation. But I'm not on the NBER BCDC.

washingtonpost.com: Number Crunchers vs. Recession: The arbiter of when U.S. economic recessions begin and end, the Business Cycle Dating Committee of the National Bureau of Economic Research, has laid the groundwork for calling an official end to the slump that began in March 2001.

It could be weeks or months before that happens, but the committee has found a way around the fact that its key monthly indicator, payroll employment, has continued to decline long after the economy resumed growing.

The committee designated March 2001 as the beginning of the recession primarily because that was when the number of payroll jobs began to drop, a decline of 2.6 million so far.

If the committee were to rely on the same indicator to date the end of the slump, the recession would already have lasted for two years and three months, making it the longest since the vastly more serious downturn that began in 1929 and became the Great Depression.

Until the 2001 recession, the employment number and other indicators used by the committee have done a generally good job of tracking the rise and fall of the nation's economic output. This time, however, changes in payroll employment have not been a good proxy for economic growth, because productivity -- the amount of goods and services produced for each hour worked -- has continued to increase through the economy's contraction in 2001 and sluggish expansion since. That has allowed companies to increase production while cutting their workforces.

The most commonly used indicator of the nation's economic output is the Commerce Department's quarterly estimates of the inflation-adjusted gross domestic product, or GDP, a broad measure of all the goods and services produced in the United States. Those estimates show that the GDP declined in each of the first three quarters of 2001 -- a clear recession, according to the committee's criteria. But the GDP began growing again in late 2001 and has continued to do so since.

"While NBER has yet to declare the recession over, the reality is that real GDP bottomed two years ago," economist David Rosenberg of Merrill Lynch & Co. told his firm's clients yesterday.

"Employment . . . has never been down so much this far into a post-recessionary phase," he said, noting that payroll employment is still 2 percent below its peak, compared with being roughly 5 percent higher at the same point in prior economic recoveries.

The current situation "makes the early-1990s 'jobless recovery' look like a hiring spree," he added.

Until now, however, the committee has never used the quarterly GDP number as one of the economic indicators it tracks, preferring instead to use four other monthly numbers. But the committee indicated recently that it has found a way to stick with its monthly indicators while adding a new one, monthly estimates of GDP calculated by Macroeconomic Advisers, a St. Louis forecasting and consulting firm.

Chances are, by giving far more weight to the GDP than it has in the past, the committee will decide before long to call an end to the 2001 recession, which many economists believe ended late that year.

This is the dating committee's official definition of a recession:

"A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough," the committee says.

In a statement issued in April, the committee said: "The traditional role of the committee is to maintain a monthly chronology, so the committee refers almost exclusively to monthly indicators. The committee gives relatively little weight to real GDP because it is only measured quarterly."

But that language was sharply revised when the next update was posted last month on the National Bureau of Economic Research's Web site:

"The committee views real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, the committee therefore places considerable weight on the estimate of real GDP issued by the Bureau of Economic Analysis of the U.S. Department of Commerce."

For the first time, the June statement included a chart showing changes in real GDP, and it added: "The committee also looks at monthly estimates of real GDP prepared by Macroeconomic Advisers."

The committee also acknowledged in its statement last month that when economic growth resumed in the fourth quarter of 2001, inflation-adjusted GDP jumped past its pre-recession peak and that it has continued to rise since then.

This week, however, the committee said in a further update that it is still too soon to call the recession over.

Of the National Bureau of Economic Research's four traditional monthly indicators, payroll employment is unambiguously still down.

But, the committee noted in its statement, "the other monthly series also paint a mixed picture."

Industrial production -- the output of the nation's factories, mines and utilities -- rose for a while but hasn't recently and remains well below its previous peak, according to the Federal Reserve.

Inflation-adjusted personal income, which excludes transfer payments such as Social Security benefits, has been rising slowly since late 2001. The number is prepared by the Conference Board, a business research group, using Commerce Department data.

And the inflation-adjusted sales measure, also produced by the Conference Board using Commerce Department data, has increased solidly since the autumn of 2001.

Posted by DeLong at July 12, 2003 09:56 AM | TrackBack

Comments

Wouldn't it be nice if the NBER had the least use to the public or is it that such economists think more of the aracna of craft than ever trying to help mere common folk understand what is happening about them.

No matter folks, your jobs are disappearing but we are trying to make up our minds whether the sky is up or down. African-American unemployment undoing middle class gains of years, no matter, we are thinking about thinking. Phooey.

Wall Street economists forever tell us how wonderful things are, and the academics are to gentile and employed to give a damn if things are not so wonderful. Phooey.

At least we have DeLong and Krugman!

Posted by: lise on July 12, 2003 10:28 AM

http://www.nytimes.com/2003/07/12/business/12RACE.html?hp

Blacks Lose Better Jobs Faster as Middle-Class Work Drops
By LOUIS UCHITELLE - NYTimes

Unemployment among blacks is rising at a faster pace than in any similar period since the mid-1970's, and the jobs lost have been mostly in manufacturing, where the pay for blacks has historically been higher than in many other fields.

Nearly 2.6 million jobs have disappeared over all during the last 28 months, which began with a brief recession that has faded into a weak recovery. Nearly 90 percent of those lost jobs were in manufacturing, according to government data, with blacks hit disproportionately harder than whites.

At the same time, jobless black Americans have been unusually persistent about staying in the labor force. Having landed millions of jobs in the booming 1990's, they have continued to look for new ones in the soft economy, and so are counted now as unemployed; if they gave up trying to find work, they would not be counted....

Posted by: lise on July 12, 2003 10:37 AM

http://www.nytimes.com/2003/07/11/national/11LABO.html

Related and more general article....

Employers Take a United Stand in Insisting on Labor Concessions
By STEVEN GREENHOUSE

JEFFERSON, Wis. For the 470 workers on strike at the Tyson Foods sausage and pepperoni plant here, the big question is why the company is so eager to cut starting salaries, freeze pensions and adopt a health plan with less coverage when the plant is so profitable.

In the first strike in the plant's 128-year history, the workers have been picketing since Feb. 28, carrying signs accusing Tyson of greed and hoping to persuade it to withdraw its demands for a string of concessions.

"They figure that this is the time to take money out of our pockets and put it back in theirs," said Chuck Moehling, who made $13.10 an hour in the sausage-stuffing operation before the strike. "The fact that they're making record profits doesn't seem to matter." ...

Posted by: lise on July 12, 2003 02:50 PM

Lise

Thanks for the important posts!

Anne

Posted by: anne on July 12, 2003 02:52 PM

There has been continuing pressure on employment and wages since March 2001. The pressure has been especially intense on corporate employment and there on manufacturing employment. The wage pressure has followed in the difficult labor market. This is a serious problem for middle income households and I see no reason for enough of a GDP growth spurt to resolve the problem soon.

While the slow growth in Europe has also pressured the labor market, the strength of unions and social safety net are a significant cushion. Still, there is little reason to project a significant growth in European employment soon unless there is a decided emphasis on domestic stimulus. Will the Euro structure allow for much more stimulus?

Folks, we have a problem.

Posted by: jd on July 12, 2003 03:39 PM

Lise is exactly right. Good posts.

Posted by: Bobby on July 12, 2003 11:27 PM

Maybe the Bush administration will just cancel the report altogether if it does not have good news. Russ Baker in Slate http://slate.msn.com/id/2085481/ has been complaining that this administration is cooking the economic data. Hard hit are Larry Lindsey and Glenn Hubbard. The press is starting to develop a script about the Bush administration giving bogus reports and cooking the data from economics to Iraq. If this script sticks, it will not be good news going into 04. Mr. Bush made a big mistake declaring the Iraq War over back in May. He is left with no cover for the continuing combat deaths. The worried public feels that the celebration was premature.

Posted by: bakho on July 13, 2003 08:11 AM

Lise - Agreed....

Posted by: jd on July 13, 2003 09:15 AM

OK 'Splain to me why I care if the recession is over if there aren't any jobs?

And, in a related vein, why should I care about market efficiencies that lead to better GDP growth if all the gains from that growth accrue to the top 5% ?

-marku

Posted by: MarkuMyDog on July 13, 2003 10:12 AM

Notice that the decline in corporate employment these past 2 years has been cushioned to an extent by employment in social service and health care and education sectors which employ women heavily. Thus, men have been effected by work loss more readily than women. Cuts in state and local budgets for social services and health or education could well present a more difficult employment problem for women in coming months.

Posted by: lise on July 13, 2003 11:53 AM

There are either cuts being made in local government budgets or fees are being raised. We are seeing stiff increases in fees for services from tuitions to licenses to court filings. Will these cuts and increases cancel out even the limited effectiveness of the latest tax cut.

Posted by: bill on July 13, 2003 02:18 PM
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