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Is the Recession Over?
Is the recession over? Federal Reserve Chair Ben Bernanke says that it very likely is. And I can almost hear the complaints: "Sure, Bernanke has a job! What about the 15 million people who were unemployed in August? Bet they don't think the recession is over!"
What Chairman Bernanke, and most economists, means when they say that a recession is over, is that the economy has stopped declining. A recession is when the production of goods and services is falling, when the number of jobs is decreasing and when retail sales are less than they were before. The recession is over when production, jobs and sales start rising again. But that means the last day of recession is the worst day of all.
What most people probably mean by recession is a less-than-satisfactory level of economic activity. We could have an unemployment rate of 5 percent, but instead it's 9.7 percent. Economists recognize this as a problem, too. It's an economy operating at less than capacity, with unemployed resources. We could produce more, but we're not. Bernanke agrees that even with the recession over, unemployment will stay up, and the economy will feel weak for some time to come.
For economists, the end of a recession doesn't mean that everything is all right. It just means that things aren't getting worse anymore.
The National Bureau of Economic Research in Cambridge, Mass., is the quasi-official umpire of recessions and expansions. They're the ones who marked December 2007 as the beginning of this recession. That month marked the peak of economic activity. It's been downhill since then.
They made that call in December 2008, which let the news media have fun writing, "This just in, recession began a year ago." The NBER wants to be absolutely sure of their dates, so they take their time.
How do we know if a recession is over? The NBER's economists look at four indicators: total payroll employment, personal income less transfer payments adjusted for inflation, manufacturing and trade sales adjusted for inflation, and the Federal Reserve's industrial production index. All of these indicators started dropping between October 2007 and January 2008.
Total payroll employment peaked in December 2007. Since then almost 7 million jobs have disappeared, and, as of August, it had not stopped falling. The only good news--and this is a stretch--is that the rate of decrease is decreasing. From November to April, employers cut almost 650 thousand jobs a month, on average. Since then, they've cut "only" 315 thousand a month.
Personal income adds up what people earn. Part of income is transfer payments, like Social Security, unemployment insurance and welfare. Transfer payments tend to rise in recessions, so when they are subtracted from personal income, what's left is a better measure of economic activity. They take out the influence of inflation for good measure. Personal income increased in July and August, after falling in 18 of the previous 21 months. This indicator may have turned the corner.
Inflation-adjusted manufacturing, wholesale and retail trade sales also appear to have stopped falling. May marked the low point for sales, so far. They grew in June, July and August. The industrial production index hit a low point in June and then increased in July and August.
So, of the four indicators that the NBER uses to mark recessions and expansions, one continues to decline; two "troughed" in June and have increased in the two months since then; and one hit its low point in May and has increased for three months since then. Is that enough to declare the recession over? Not according to the NBER, of course. Those careful observers will probably wait until the middle of next year to make their call.
Conveniently, these four indicators make up the "Index of Coincident Indicators" announced each month by the Conference Board. That index is up (a little) since June.
I guess that the NBER will end up marking the end of the recession sometime from May to August, 2009. The recession probably is over. But, remember, that doesn't mean that everything will soon be OK. The first day of recovery feels a lot like the last day of recession.