For those who don’t want to read further, I’ll give the answer up front: They don’t know how they will do it.
The introductory statement is actually too harsh, but it is true that the NBER process does not have strict mathematical definitions. And the lead certainly is good attention grabbing journalism.
The dating process is made by a “weighing and sifting” process and a best judgment call is made as to what are the starting and ending months for any recession. The people involved in the process are not hacks; they are among the brightest and best trained macroeconomists we have. It is unfortunate for them that macroeconomics in general is in such disarray today. However, the disarray of the field in general does not detract from the regard that I hold these “recession hunters”. With that introduction, let’s examine some details.
The start and end dates of recessions are fixed by the NBER (National Bureau of Economic Research). A committee of economists examines a broad range of economic factors to determine when the preponderance of evidence indicates that a peak in economic activity has been passed (the start of a recession) and when a trough is indicated by a preponderance of the factors (the end of a recession). A quote from the NBER dating procedure document (here) explains the process and emphasizes that there is some degree of flexibility in the determination of start and end dates:
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 here). 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.
(Italicizing was added by the author for emphasis.)
The exact analysis practices are not published, so an outsider must examine the behavior of the economy without exact visibility to the process and numbers used by the NBER.
A recent discussion by Invictus, writing at The Big Picture, addresses the problem of interpreting the inexact processes of the NBER. Invictus provided a link to a January 21, 2010 Statement issued by NBER further clarifying the unclear. The latest includes the following statement:
The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP). The Committee’s use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs.
(Again, italicizing added by yours truly for emphasis.)
This statement serves to cloud the prior inexact procedure document quite nicely. No wonder economics is called the dismal science. The designation is only half correct, the dismal half.
It is not within the scope of this analyst to propose (at this point in time) what is a better, more precisely defined process for designating the start and end of recessions. However, I take this situation as a personal challenge to work at trying to determine what the nature of a better process might entail. Perhaps others will undertake this and surpass my efforts. That would be good – I have my limitations.
Tomorrow I plan to post an article discussing the business cycle, the phenomenon that encompasses a recession as one of its phases.
Note: The Business Cycle Dating Committee is composed of people selected from group responsible for research on Economic Fluctuations and Growth, although others not on this list may be invited to participate. The Business Cycle Dating Committee that determined the December 2007 start date that was announced in December, 2008 was:
Robert Hall, Stanford University (chair);
Martin Feldstein, Harvard University and NBER President Emeritus;
Jeffrey Frankel, Harvard University;
Robert Gordon, Northwestern University;
James Poterba, MIT and NBER President;
David Romer, University of California, Berkeley;
Victor Zarnowitz, the Conference Board.
Disclosure: No stocks mentioned.
