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Is This a Recession?
Is this a recession? No, it's not, say some Wall Street pundits. A recession is two straight quarters of declining gross domestic product—that's GDP, the broadest measure of what our economy produces. We haven't seen even one quarter of decline (through the first quarter, anyway).
Two quarters of GDP decline is one definition of recession. But it's not the definition that the National Bureau of Economic Research uses, and the NBER is the quasi-official marker of recessions. They've got a list of start and end dates for recessions going back to 1854. You can see it at www.nber.org/cycles/main.html.
The NBER marked the last recession as starting in March 2001 (the peak) and ending in November 2001 (the trough). Funny thing, though, in 2001, GDP did not decline for two straight quarters. It fell in the first quarter, rose in the second quarter, fell in the third and rose in the fourth. The two-quarter rule doesn't see a recession in 2001. There must be some other way to mark recessions.
The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months." It focuses on four indicators to mark peaks and troughs: total employment on non-farm payrolls, the index of industrial production, personal income less transfers, and manufacturing and trade sales.
It doesn't use GDP for a very practical reason. GDP is measured quarterly, and the NBER marks peaks and troughs by month. That last indicator, manufacturing and trade sales, is based on the raw data used to calculate GDP, so GDP numbers are considered.
If we want to know whether 2008 will be an "official" recession year, maybe we should look at the indicators that the officials use. And, sure enough, all four of those indicators have already peaked and have begun to decline. Total employment peaked in December, industrial production peaked in January, personal income less transfers peaked in February, and manufacturing and trade sales peaked all the way back in October.
So, it's a recession, right? Not so fast. Is the decline "significant" enough to be called a recession? All four indicators are dropping, but they haven't dropped very much. Total employment is down just 0.3 percent from its peak. In the 2001 recession, it fell 2 percent, peak to trough. Industrial production is down 0.8 percent this year, but it fell all of 6 percent in the last recession. Personal income is down 0.2 percent this time, while it dropped 1.4 percent last time. And sales are down 2 percent since October, while they fell 4 percent last time.
That's probably what the NBER is waiting for, to see whether or not this downturn turns down enough to be called a recession. Not yet, apparently. But its economists usually take their time. Back in 2001, they announced in November that a recession had begun the previous March.
If the economy keeps declining, sometime this fall, the NBER will announce that we're in a recession. It will probably mark the peak sometime between October 2007 and February 2008. If the economy starts growing soon, there may not be an announcement. The decline won't be significant enough to qualify as a recession.
There's actually an easy way to keep track of how the four indicators are doing. These four make up the "index of coincident indicators," which is published by the Conference Board each month. The coincident indicator index is a sister of the index of leading indicators. The leading index looks ahead to what might happen in coming months. The coincident index looks at what's happening now. You can see the press releases at www.conference-board.org.
The coincident index has peaked already, too, back in October. But it's down only 0.4 percent since then.
Of course, if your neighborhood has seen foreclosures, if businesses in your town have shut down or if family members are facing hardships because of gas prices, you may have your own opinion about recession. We each have our own personal business cycles.
Whether enough of us are in personal recessions to add up to a national recession, though, depends on the national indicators. Is this a national recession? Maybe, but it's too soon to tell.