Technical Recovery Won't Feel Much Like a Recovery

Everyone is trying to gauge when a ‘recovery’ is going to occur in the United States and globally. Some see imminent recovery. Others like myself see a late-2009 or early-2010 recovery. Yet others, including most readers of my blog, see no recovery for quite some time. So, naturally, we should ask: just what is a ‘recovery’ anyway? Below, I want to answer this question and introduce the term ‘technical recovery.’

In the U.S., the National Bureau of Economic Research is the arbiter of recession. In announcing the beginning of this recession, the NBER issued a statement with some informative FAQs. Below are some highlights. The link to the full text is here.

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER’s recession dating procedure?

A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. As an example, the last recession, in 2001, did not include two consecutive quarters of decline. As of the date of the committee’s meeting, the economy had not yet experienced two consecutive quarters of decline.

Q: Why doesn’t the committee accept the two-quarter definition?

A: The committee’s procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP, but use a range of indicators. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in activity.” Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates. The differences between these two sets of estimates were particularly evident in 2007 and 2008.

Q: Isn’t a recession a period of diminished economic activity?

A: It’s more accurate to say that a recession—the way we use the word—is a period of diminishing activity rather than diminished activity. We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when economic activity is contracting. The following period is an expansion.

I would like to highlight the term ‘diminishing activity’ and the answer to the last question above because this is the crux of the matter. The NBER is looking to date the period when economic activity is diminishing, not when it is diminished. That means that economic activity MUST be LOWER when an economy ends recession and starts a recover than when it entered the recession. Recovery starts from a position of diminished economic activity. I attempted to get this point across in detail in my post “Economic recovery and the perverse math of GDP reporting.”

So when Nouriel Roubini says that a recovery in 2010 will be so slow that it will feel like a recession, this is what he is talking about. Most people will not think of this as recovery any more than they did in 2002 or 1991.

The period just following recession until the previous level of output before recession is re-attained is what I will term a ‘technical recovery.’ This is a time during which economic activity is increasing, but the economy is still operating below levels of the recent past. Unemployment will still be rising and many businesses will still be going bankrupt. Because this period will still be very painful for many, it seems perverse to call it a recovery. So, let’s use the term ‘technical recovery’ to describe this phenomenon. That way, we all understand the reality behind the numbers.

Comments

[John Lounsbury:]

Edward - - -

Valuable article for all the "green shooters" and the "world is ending" crowds alike. What we may experience over the next few years may leave both groups feeling they were wrong. And the mass of us confused in the middle will be wondering why, if the green shoots weren't all that green, why the world didn't end. We'll also be wondering why, if the world didn't end, it feels as if it did.

I can't bring myself to accept that we will fail to eventually come out of this situation stronger and more competitive; I just don't have any view as to the timeline.

It is a good thing to go back to basics of the business cycle from time to time to bring some perspective. We have gone this way before (although not in the last 60 years) and we have prevailed.

Thanks for taking us back to basics, Edward.

Jul 05 03:30 PM

[CautiousInv...:]

Thanks Edward and I will provide a bit more material from the NBER:

In choosing the dates of business-cycle turning points, we follow standard procedures to assure continuity in the chronology. Because a recession influences the economy broadly and is not confined to one sector, we emphasize economy-wide measures of economic activity. We view real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, we therefore place considerable weight on the estimates of real GDP issued by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce. The traditional role of the committee is to maintain a monthly chronology, however, and the BEA's real GDP estimates are only available quarterly. For this reason, we refer to a variety of monthly indicators to determine the months of peaks and troughs.

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, we refer 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. We also look at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see 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.

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Another reason Nouriel Roubini made the remarks he did is that he, along with Bill Gross, subscribe to the new normal in which future nominal growth could be on the order of 2%.........and even this level is likely to take some time to achieve. Worded differently, the slope of the recovery will be rather flat and 5.5% unemployment is not likley to be seen until 2014.

Jul 05 06:38 PM

[Steven Hansen:]

edward, i totally agree with your recession and recovery discussion based on our current definitions.

but here is the rub - most people think recovery is the process of economically returning to a past normal. the politicians know this and use the word recovery in ways to imply return to past normal.

i for one believe this should be called a depression because few believe we are returning to the past normal soon. even calling this a depression is misleading as it will be nothing like the great depression - it will be much shallower, and harder to escape.

Jul 05 11:08 PM