An Overview of the Current Status of the Recession
TASA ID: 3224
Much has been both written and spoken about the current status of the nation's economy, namely whether it is still in a recession. With that in mind, we put together this brief summary of who defines a recession, the definition of a recession and how its timing is determined.
The National Bureau of Economic Research's (NBER) determination of the definition and timing of a recession, as well as a business expansion, has been accepted since 1961. The NBER is a private research organization that engages in research for many different economic issues and publishes studies regularly. The Bureau maintains its main office in Cambridge, Massachusetts. Within the NBER, there is the "NBER Business Cycle Dating Committee," a group of prominent economists that reviews and studies trends for the nation's economy. The committee also maintains or determines the chronology or the timing for the dates of expansions and recessions of the U.S. economy1.
Generally, business cycle activity is looked at in terms of expansions and recessions. Expansions are the periods when the economy is in a pattern of growth, namely from a trough, a low point, to a high point or a peak. During an expansion, activity rises substantially across many sectors of the economy and lasts for several years. Conversely, a recession reflects a period between a peak and a trough, with a significant decrease in economic activity felt across many sectors and lasting from a few months to more than a year.
The key measure for economic activity, but not the only one that is being tracked, is the nation's Gross Domestic Product, defined as the sum of all goods and services produced in the United States within a specific time period, generally a year. However, to eliminate the effect of inflation, economists generally look at the nation's real Gross Domestic Product, namely the sum of all the goods and services produced in the United States but stripping out price variations.
While there is a widely accepted notion that a recession is a decrease of two consecutive quarters of real Gross Domestic Product, that is not how the Business Cycle Dating Committee determines the timing for a recession.
The committee applies its judgment based on the definitions just stated, but it does not have a fixed rule as to the timing of a recession or expansion. Similarly, the committee does not have a specific or fixed definition for economic activity. It will examine and compare the trends for generally broad measures for activity such as the real GDP, national employment and various measures for income. It may also consider indicators that do not measure the entire economy but rather some key indicators, namely retail sales or industrial production. The indication of a well-defined peak or trough, in a particular sector, may help to determine the peak for the overall economy if the broader indicators are in conflict, or do not have well defined peaks or troughs.
With that as a background, we will discuss some issues concerning the timing of the recession. It is important to remember that data reflective of the status of the economy is released some time after the actual activity occurred, perhaps a few days to several weeks following the period's close. In addition, the data may be subject to revision by the government agency due to a number of factors, and it may be many months or longer before the data reflective of the activity is finalized.
Please also note that data for the GDP is published on a quarterly basis. Yet, the committee sets the data for the start or end of a recession during a particular month. To that end, it also considers data that is released on a monthly basis and works with a private consulting firm to estimate total economic activity on a monthly basis.
With that said, the actual determination that the economy has reached a peak or a trough may not be seen and agreed to for several months by the members of the Business Cycle Dating Committee. Thus, the decision for setting a peak or a trough may not be made for several months after the particular trough or peak has been reached.
For example, for the brief 2001 recession, the peak, or start of the recession, which was set at March 2001, was not determined until November 2001. It was actually not until July 2003, that it was determined that the recession ended in November 2001, close to two years after it ended.
The start of the recession, namely December 2007, was not determined until November 2008 by the committee, and the announcement was made at the start of the following month. The broadest measure for the economy, namely real GDP, fell for four consecutive quarters and started to rise during the third quarter of 2009. Thus, many economists and the current Federal Reserve Chairman, Ben Bernanke, feel that the committee will determine that the recession ended possibly during July or August 2009, but it may not be until the summer of 2010 when a determination is made by the committee2.
Again, to reiterate the point that the actual determination is to some degree arbitrary, as part of the NBER release that announced the recession started in December 2007, a number of questions and answers on the determination were attached to the announcement. One question dealt with whether the committee felt that the economy peaked in December 2007 and then diminished. The response to the question stated, "Economic activity measured by production was close to flat from roughly September 2007 to roughly June 2008, while activity measured by employment reached a clear peak in December 2007. The committee judged that the weight of the evidence suggested that the peak occurred in December 2007." This would indicate that any time during September 2007 through June 2008 could have been judged the start of the recession, but the committee used a second data source to determine the start of recession.
One more point for discussion. Even though the real GDP has posted strong gains during the third and fourth quarter of 2009, many sectors continue to decrease even with the rise in the real GDP. Specifically, the nation's labor market has lost in excess of 8 million jobs since the recession started in December 2007, and except for one month, employment has decreased since the recession. It may be many years before it recovers to the level at the start of the recession. With that said, a number of economists have said that there may be a need to redefine the meaning and length of a recession.
Narayana R. Kocherlakota, President of the Minneapolis Federal Reserve Bank, said recently that the decline in the Gross National Product was not felt evenly across the population. He also said, "Some workers - those who lose their jobs - suffer much bigger falls in income. For this reason, many macroeconomists now believe that the true cost of a recession is not the fall in GDP per se, but the associated increase in the risk of people becoming, and staying unemployed. To get a true expansion in employment and in the economy, the hiring rate has to pick up - and we have yet to see evidence that it will do so in the immediate future."3
Endnotes:
1National Bureau of Economic Research. 1 Dec. 2008. National Bureau of Economic Research. 16 Feb. 2010 <http://www.nber.org>.
2Labaton, Stephen. "Fed Chief Says Recession Is 'Very Likely Over.'" The New York Times. 16 September 2009. Newspaper online. Available fromhttp://www.nytimes.com/2009/09/16/business/economy/16bernanke.html. Internet. Accessed 8 February 2010.
3Sewell Chan, "Federal Reserve Officials, Often Tight-Lipped, Openly Voice Deficit Concerns," The New York Times 17 Feb. 2010: B3.
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