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12-28-01
Peaks and Troughs
We'd been agonizing for months about whether or
not we were in a recession. Doing worse than last year? No doubt. Layoffs
in manufacturing? A bunch. Playing havoc with the state's budget? Absolutely.
But a recession? Maybe yes, maybe no.
Until a few weeks ago, that is, when the economists
at the National Bureau of Economic Research declared that, not only is
this a recession, but it started last March! Who are these people, and
how come they get to mark the starting and ending points of recessions?
The NBER is a non-profit research group in Cambridge,
Mass. It was founded in 1920 and made its reputation especially for work
on the business cycle--the succession of expansions and recessions that
afflict our economy.
If you're going to study expansions and recessions,
you need to know when they happened. So the NBER combed through economic
records and picked dates for the starting and stopping months of recessions,
all the way back to 1854. The start of a recession is called a "peak,"
when economic activity stops climbing and starts falling. The end of a
recession is a "trough," when activity stops falling and starts climbing
again.
For example, the peak of the big one--the Great
Depression--is marked in August 1929 (yes, before the stock market crash
in October). The trough is marked in March 1933. We usually think of the
Depression lasting throughout the 1930s, but the NBER puts the trough
in 1933. That's because the time from peak to trough is a "contraction,"
when economic activity is falling. The economy sank so low during those
43 months that it took the rest of the decade to get back to where it
had been. While it was doing so, though, it was growing; so the NBER calls
most of that period an expansion.
Before March, the last trough they'd marked was
in March 1991, the end of the last recession. The expansion of the 1990s
lasted exactly 10 years, according to the NBER. It was the longest expansion
in U.S. history, more than a year longer than the expansion of the 1960s.
One really useful thing to do with peak and trough
dates is to compare them to measures of economic activity. Take the inventory-sales
ratio, for example. Retailers order products months in advance, trying
to anticipate how much consumers will want to buy. Sometimes sales don't
meet expectations, and the inventory of goods doesn't sell. Sales go down
and inventories go up, so the ratio of inventories to sales increases.
Eventually, retailers cut back on their orders from factories, not wanting
to order more goods until their inventory is sold. Factories produce less,
and employees are laid off. Retailers don't order more until they've sold
the excess inventory.
If you compare the inventory-sales ratio to the
peak and trough dates, you'll see that the ratio usually starts rising
before the peak. That's before the recession starts. The ratio starts
falling during the recession, after the peak, but before the trough. Makes
sense--manufacturers don't start producing more products and hiring more
workers until retailers sell the old inventories.
Looks like the inventory-sales ratio peaked in
June and has been falling since. Retailers are selling off old inventory.
That usually happens before the recession trough, so maybe we're on our
way. On the other hand, a measurement called the index of consumer expectations
usually falls before peaks and rises before troughs. Consumers have to
get optimistic before they start buying. We haven't seen much evidence
of rising consumer expectations yet.
We've been in recession since March. That's bad
news, but maybe there's a silver lining in this economic cloud. It took
the NBER eight months to identify the peak date. The average recession
since World War II has lasted 11 months. If this recession is average,
the trough will be in February 2002. That's a glint of silver. By the
time we know we're in the average recession, it's almost over.
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