The one criterion that has been missing is the one criterion that people most commonly have in their minds as the definition of a recession: two consecutive quarters of negative growth. This morning, October 30, the Commerce Department released the preliminary estimate of GDP in the 3rd quarter. It showed a decline. The decline was small: just 0.3 per cent at an annual rate, and it is only quarter. But at this point there can be little doubt that we are really truly in recession. The adverse shocks include the most severe housing bust in more than 70 years, an oil shock as big as those of the 1970s, the greatest financial crisis since the Great Depression, and the worst fiscal outlook ever. Any one of these developments would normally be enough to send an economy into recession. Leading economists from Martin Feldstein to Larry Summers have been warning since the start of the year that the downturn has indeed arrived, not to mention Nouriel Roubini who forecast it far ahead of time. And sure enough, many of the most reliable statistical indicators have suggested all year that we are in recession. The most important statistical criterion besides GDP is employment. Jobs peaked in December 2007 and have declined steadily ever since. The cumulative loss is 760 thousand (or 0.55%) as of September. My personal favorite among indicators is Total Hours Worked in the economy, because it combines both employment (number of people working) and average length of workweek (are they working 40 hours a week? Overtime? Part-time?). Total Hours Worked shows a similar pattern as employment, but with an even steeper decline since December: 1.4%. (The Bureau of Labor Statistics is the agency that releases these numbers, on the first Friday of the subsequent month.) The index Leading Economic Indicators, which is designed to try to warn of turning points in advance, turned down more than a year ago. Not only that, but also the index of Coincident Economic Indicators, which is supposed to move contemporaneously with the real economy, appears clearly to indicate that a recession started toward the end of 2007. Housing prices as of August are down 27%, relative to their peak in July 2006 (Case-Shiller composite of 20 cities). Consumer confidence, an important determinant of household spending, fell to an all-time low in September, according to the October 28 release from the Conference Board. The version collected by the University of Michigan is also looking quite bleak. Retail sales are down, especially autos. The trend in industrial production has been downward for a year, and accelerated in August and September. Corporate profits are down. But it is still not yet officially a recession ! Why not? The most important criterion for dating business cycles is real growth. The rate of change of real GDP, surprisingly, was above zero in the first quarter of 2008, and was even moderately strong in the second quarter: 2.8%. (The revised “final” estimate of GDP in the fourth quarter of 2007 did turn out to be below zero, but just barely.) It is quite a mystery why output pointed up during the first half of the year, while everything else pointed down. Clearly the demand for US goods received some boost in the 2nd quarter from tax rebates and exports, both of which are expected to diminish subsequently.
But perhaps there is some measurement problem with GDP. Gross National Income (GNI) has as much claim to measure growth as Gross National Product does. In theory the two are supposed to be virtually the same: the value of goods and services sold is conceptually the same as the value of income earned. Real GNI did in fact turn down in the 4th quarter of 2007 and the first quarter of 2008, though it rebounded in the third quarter as real output did. Real personal income – one of the indicators that the NBER Business Cycle Dating Committee looks at – has been declining almost throughout the year. The weight of evidence is overwhelming: we are currently in recession. Did it start at the end of 2007, when employment and the other indicators peaked? Or was the stimulus from the government and from exports enough to hold off the turning point, and did the recession thus only start towards the end of the summer, when the financial crisis intensified very sharply? I am afraid that we need to wait for some more data and some more (regularly scheduled) revisions before we will know.
Originally published at Jeffrey Frankels weblog and reproduced here with the author’s permission.
6 Responses to “NOW Are We In A Recession?”
Great piece. Times are scary, no? The U.S. economy has surely taken quite a hit over the past few months. With recession and the need for reform on the minds of a majority of Americans, we thought you would be interested in two non-partisan guides we’ve put together here at Public Agenda on the economy (http://publicagenda.org/citizen/electionguides/economy) and taxes, spending and debt (http://publicagenda.org/citizen/electionguides/taxesdebt). Feel free to check these out and get back to me with any questions. Thanks again for an informative piece!
If the costs of the war in Iraq and other wasteful government expenses are included into GDP, to say that GDP is growing (while contribution from real personal incomes is falling) is a joke.
I personally agree that the war in Iraq and a lot of other defense spending is wasteful at best, and harmful to genuine national security at worst. But that view does not help reconcile rising GDP figures with decling real income figures. Defense spending, regardless whether wasteful or not, is received as income by the businessmen and workers whose goods and services are purchased.Jeff Frankel
In reference to the real estate market, it seems worse to me this year when compared to last year. The mortgage mess definitely did not help the economy and I don’t expect the real estate market in my area (Colorado Springs) to improve until late 2009. From the information you posted above, it does seem as though we are indeed in a recession right now.
From the November 2001 release declaring a peak in March of that year:”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 trade. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. 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 and it is subject to continuing, large revisions.”Clearly every metric peaked in either late 2007 or very early 2008. Of that there can be no doubt. Further, this part of the 2001 release bears repeating: “The committee gives relatively little weight to real GDP because it is only measured quarterly and it is subject to continuing, large revisions.” Notwithstanding this very important comment, GDP printed negative in Q4 2007 in any event.The notion that a recession may not have begun until the “financial crisis” took (another) leg down is not credible, in my opinion.
You make a good point. That November 2001 release makes it sound like the Committee pays little attention to real GDP, perhaps less attention than we actually do. I would say real GDP is at least on a par with the other indicators. And, again, I personally may be inclined to agree with you that the recession probably did start a year ago. But the committee as a whole is not yet ready to date the peak, and even I don’t think the case for choosing any one particular date is ironclad.JF