When Did the Recession Begin?

The common media definition of a recession is two consecutive quarters of negative GDP growth. Technically, that’s not correct. For example, at the beginning of this decade, we never had two straight quarter of falling GDP, but it certainly felt like a recession to me, and lots of other folks.

The National Bureau of Economic Research is the widely-regarded outfit in charge of dating business cycles. While they regard quarterly GDP as “the single best measure of aggregate economic activity,” NBER prefers to use monthly numbers to pinpoint the beginning and ending of business cycles.

This is what NBER has to say about their guidelines:

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, the committee refers to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. The committee also looks at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

It’s not a perfect science establishing when a recession begins because we have to identify two points: One, when does the economy not just slow down, but actually contract; and two, we need to look at the entire economy not just high-profile sectors like real estate.

NBER has already said that a recession has begun, but now it has to decide when. A decision probably won’t be made public for another while, so in the service of goodwill, I’ll try to help them out.

The difficulty this time around is that the GDP figures aren’t so clear cut. Employment, for example, clearly peaked about one year ago, but exports segments of the economy still did well. GDP growth for last year’s fourth quarter was -0.17%, but I strongly doubt the committee will target a date that far back for the start of the recession. The reason is that GDP grew by 0.87% in the first quarter and another 2.82% in the second quarter (these are annualized numbers). The committee has never before overridden such strong numbers. I just don’t see them dating a starting point before then.

The issue becomes much clear by the third quarter when GDP came in at -0.25%. I also think that number will be revised lower in the months ahead. My advice is to date the start of the recession in May. There were two important events in May. The unemployment rate jumped from 5% to 5.5%. That was the largest monthly jump since 1980.

The other reason isn’t a metric that NBER looks at, but one I think they ought to consider, and I’m referring to when the stock market broke down in May. The S&P 500 peaked last October 9 at 1565.15, however it showed some strength from mid-March to mid-May. Since May 20, however, the market has been in almost continuous retreat.

I think the market has become a better gauge of broader economic cycles due to the democratization of Wall Street. When the market goes up, people are wealthier and they spend more. When they see their 401k’s rise, they feel more confident about buying big-ticker items. When the opposite happens, they feel less confident. Up through May, the market had suffered a break, but only since May 20 has it really deflated. That’s when the troubles hit everyone.

Comments

[Steven Hansen:]

July or August 2008.

seekingalpha.com/artic...

2008 Nov 13 03:52 AM

[john s. gordon:]

the current recession began in june 2007. that's when banks refused to make loans to credit-worthy borrowers.
> jack

2008 Nov 13 08:41 AM

[john s. gordon:]

the current recession began in june 2007. that's when banks refused to make loans to credit-worthy borrowers.
> jack

2008 Nov 13 08:42 AM

[Still Renting:]

Last October. It was very clear even then.

I live in Seattle where everyone thought we were immune to this, but you could see it in the way people talked at work, the problems people were having with their jobs, finances, losing their homes, etc. And I work at a STRONG company.

It may not have been a "technical" recession, but it was clear all around you that PEOPLE were in "recession".

Last October it became a bit comical to me in a morbid sort of way. It was like watching a drowning man go down for the third time but the press told him he wasn't drowning - and he believed it to the point that he almost assumed he must be imagining the drowning.

2008 Nov 13 11:25 AM

[The_Value_I...:]

I like that we are seeing more and more people state the popular definition of a recession is the wrong definition. I feel the recession began last December. Holiday sales were weak, housing (20% give or take of GDP) was free-falling and confidence was low. Almost every bank had admitted there would be losses and the economic conditions would weaken. I don't think that those Q1 & 2 numbers matter as much b/c there is an economic stimulus built into that. I think the reason that everything has gotten so bad is not the bets people made (which were stupid) but people's lack of ability to see the tidal wave coming until it was 100ft high. David Rosenberg was one of the first people to talk about a slowdown that would start with housing and spread to credit markets as peoples home began to accumulate negative equity. I don't have it in front of me but I believe that was Q2ish if 2007.

2008 Nov 13 05:21 PM

[Asbytec:]

Recession begins when you lose your job.

Depression begins when you lose your home.

2008 Nov 15 12:25 PM