Business

How we'll know we're in a recession

A recession isn't officially a recession until the National Bureau of Economic Research says it is.

You don't have to wait for them, though. The nonpartisan group often doesn't declare a recession until after it's over – but when unemployment is high as incomes fall, you may know it's a recession long before any economic brain trust has made it official.

Take, say, most of this year. For a lot of people, it has felt like a recession.

Alan Greenspan, a former Federal Reserve chairman, said after Bear Stearns collapsed in March that “the current financial crisis in the U.S. is likely to be judged as the most wrenching” since the end of World War II. And Harvard professor Martin Feldstein, former head of the National Bureau of Economic Research, said that month he believed the country was in a recession that could be severe.

Here are some questions and answers about how a recession is declared:

Q: Who decides when a recession has begun?

The National Bureau of Economic Research, a private, nonprofit research organization, is the arbiter of recessions.

The group, founded in 1920, has more than 1,000 university professors and researchers who act as bureau associates, studying how the economy works. Sixteen of the 31 American Nobel Prize winners in economics and six of the past chairmen of the president's Council of Economic Advisers have been NBER researchers.

The group's Business Cycle Dating Committee makes the call on recessions. The small committee – recently it had only seven members – is made up of experts on the economic peaks and valleys that make up expansions and recessions.

Q: What qualifies as a recession for the NBER?

The NBER's definition of a recession is a significant decline in economic activity spread across the economy lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale and retail trade.

GDP, or gross domestic product, is a measure of the value of all goods and services produced within the United States.

Recession dates are determined by high and low points within the nation's “business cycle” – periods of economic growth and contraction. A recession begins when the economy peaks at the top of an expansion period. It continues as the economy contracts until it hits the “trough,” the lowest point in the downward cycle. After that, the economy begins to recover. The “peak” date is the beginning of a recession, the “trough” date its end.

The last official recession began when the economy peaked in March 2001. It lasted eight months, ending in November 2001, when the economy hit its bottom for that business cycle. Previously, the economy had expanded for 10 years.

The NBER often doesn't make its recession calls in what feels like a timely manner because its Business Cycle Dating Committee waits for the most accurate revised data – which can take a year or more to calculate.

The committee didn't announce the March 2001 peak and the onset of the last recession until November 26, 2001 – the month that recession ended. It didn't announce the November 2001 trough until July 16, 2003, more than a year and a half after it was over.

Q: How does the NBER determine the ups and downs?

The NBER views real gross domestic product, the broadest measure of the economy, as the best measure of economic activity, but it uses many other indicators, since GDP is subject to considerable (and time-consuming) revision.

The classic definition of a recession is two consecutive quarters of declining GDP. But not every recession has fit that description. And sometimes waiting for the most accurate GDP numbers would mean waiting for years after the recession ended. If the group had waited for data showing two quarters of decline in 2001, it wouldn't have been able to say that recession had started until August 2002.

That's why the NBER also examines monthly indicators – especially real personal income, employment, industrial production and retail and wholesale sales – with no fixed formula for how each of the different indicators is weighted.

Q: Since the recession may be over by the time it's officially declared, why bother setting the dates?

If the official recession call seems academic, it often is. Most times, by the time a downturn has been labeled a recession, it's wrapping up. That's why policymakers follow so many economic indicators themselves – so they can keep their own gauges of how the economy is doing.

By officially calling recessions, however, the NBER helps policymakers, economists and historians chart the past and find patterns in the downturns we've already experienced.

  Comments