Dating the Recession

Alarmed by the coronavirus-induced economic collapse, the NBER declares the economy in a recession in record time.

By John Miller

My wife Ellen and I got married in 2013 after living together for 15 years. The Justice of the Peace who married us told our twelve-year old son Sam that are we had already been married, and all she was doing was helping us fill out the paper work to make our marriage official.

On June 8 of this year, the National Bureau of Economics Research (NBER), the nation’s official arbiter of the business cycle, finished its paper work, and made what we already knew official:  The COVID-19 economic collapse is a recession, and a damn bad one.   After reviewing data on the calamitous drop in employment and consumer spending and the deterioration of other economic variables, the NBER declared that the recession began in February (2020).

The depth and diffusion across the economy of the downturn convinced the NBER to announce the onset of the recession far more quickly than it usually does.   The Business Cycle Dating Committee waited a full year into the recession to declare that the Great Recession had begun in December 2007. This time, the NBER declared the onset of the recession just four months after it had begun.  The downturn was so pronounced that the dating committee didn’t bother waiting for data to confirm that the economic contraction would meet the economist’s shorthand definition of a recession, two consecutive quarters of negative real (corrected for inflation) GDP growth.

Identifying Business Cycles

To understand what economists call a “recession,” we need to look more closely at the method used by the NBER dating committee to date a business cycle, and its two phases–economic expansions and economic contractions (also called “recessions”).

The NBER tracks the waves of economic activity that economists call “business cycles.” A business cycle runs its course from trough of a recession to the peak of an expansion and back down into a trough. In the first phase of the cycle–the expansion–the economy grows as companies produce more goods and services and hire workers. When the economy begins contracting, its second phase, companies produce fewer goods and workers lose their jobs. The NBER has identified ten complete business cycles in the U.S. economy since World War II. The current task of the NBER was to decide when the expansion of the business cycle that began in June 2009 ended and entered its recession phase.

The NBER’s Dating Committee, a group of eight economists, has no rigid rules for determining the start or finish of a business cycle. For instance, the committee looks for “a significant decline in economic activity that is spread across the economy and lasts more than a few months” to identify a recession. The committee considers a broad array of macroeconomic indicators put pays particular attention to two broad monthly measures personal income less transfer payments, in real terms, and payroll employment from the Bureau of Labor Statistics’ household survey, just as they did in dating the onset of the current recession.

In short, the committee eyeballs the data and is guided by their malleable definition of an economic contraction to identify a recession. Dating a recession using the economists’ shorthand definition of a recession as two consecutive quarters of negative real growth measured by GDP would assign similar starting and ending points to a recession, but not always – particularly when a downturn is interrupted by a quarter of slow but positive economic growth. In addition, GDP data are available only after a considerable lag and are often subject to revision.

End of the Expansion

The NBER announcement also closed the books on the economic expansion that began in June 2009 lasted 128 months, making it the longest expansion on record.  The expansion, which spanned the Obama and Trump presidencies, might have been historically long it was also slow, and did little to improve the lot of most people by historical standards.  “Long but limp growth” was The Financial Times’ far from flattering description of U.S. economic performance during the decade long expansion. Its 2.3% economic growth rate was the slowest of any U.S. economic expansions since 1949.  It also failed to even match the 2.9% average posted by the sluggish economic expansion during the last decade that led up the Great Recession, and it was nowhere close to the 4.3% average growth of the ten previous expansions since 1949.

The employment record of the expansion was also a mixed bag. The expansion created fewer jobs per month than any economic expansions in the last five decades with the exception of the jobless expansion from 2002 through 2007.  But 113 straight months of positive job growth was enough to push the unemployment rate down to 3.5%, the lowest rates since 1969.  Still falling unemployment rates did little to improve workers’ wages.   Average hourly earning of production and non-supervisory workers corrected for inflation rose just 0.7%, per year, slower than the 1.1% per year rate during the 120 month long expansion in the 1990s, less than half of the 1.7% per year rate during the 106 month long economic expansion of the 1960s. Only the dismal wage growth during the expansion of the previous decade did worse.

All told, working people were tightening their economic belts even when the economy was expanding.  Now that the COVID-19 economy is contracting at an alarming rate, we are in real trouble.  But you probably didn’t need the NBER to tell you that.

John Miller is a professor of economics at Wheaton College, a member of the Dollars & Sense collective, and author of the “Up Against the Wall Street Journal” column in D&S. 

Sources:   “NBER Determination of the February 2020 Peak in Economic Activity,”  National Bureau of Economic Research, June 8, 2020; “The record-breaking US economic recovery in charts,” by Robin Wigglesworth and Keith Fray, The Financial Times, July 4, 2019;  Bureau of Labor Statistics, Total private: Average Hourly Earnings of Production and Nonsupervisory Employees, 1982-84 Dollars, Seasonally Adjusted.  Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED), Real Gross Domestic Product, Billions of Chained 2012 Dollars, Quarterly, Seasonally Adjusted Quarterly; and, All Employees: Total Nonfarm Payrolls, Thousands of Persons, Monthly Seasonally Adjusted Monthly; Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED).

 

Leave a Reply