Why NBER Is Dithering About Recession's End

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by: Jeffrey Frankel

The NBER Business Cycle Dating Committee on Monday posted an announcement that it had met in person - an infrequent event - on April 8th, and that it had not yet decided to call the trough in the recession that began in December 2007.

The meeting has led to lots of questions from the press over the weekend, generating stories that appeared Monday, and then more questions today in response to those stories. Here are some of the questions that have come up the most often, and my own personal answers.

(Note: I am speaking for myself and not the Committee of which I am a member.)

Q: What importance should individual investors, workers and consumers attach to this announcement by the NBER?

A: Probably none.

Q: Why would the Business Cycle Dating Committee put out such a statement, if it was a non-event?

A: The press was bound to find out that there had been an in-person meeting (as it did), and so the confusion created by issuing the statement was probably less than the confusion that would have been created by remaining mysteriously silent.

Q: Is this the first time the Committee has issued a statement to say that it hasn’t reached a decision? Shouldn’t it be interpreted as suggesting that we are still in the recession?

A: No, and no.

Q: You are not worried that the financial markets will react negatively to the NBER statement on Monday?

A: No.

Q: What signs indicate to you, personally, that the recession is probably over, as you indicated in your blogpost a week ago?

A: Growth was strong in the second half of 2009, and was pretty clearly positive in the first quarter of this year as well. Incidentally, these days we pay at least as much attention to national income as to GDP in assessing growth; in theory the two should be the same, but in practice they are not.

The labor market has lagged behind, as is common, but in October the total hours worked by the labor force began to increase again, followed more recently by employment. The BLS report on April 2 was particularly encouraging, after so many job losses in 2008 and 2009. Thus there is a high probability that the economy reached its trough sometime last year .

Q: When exactly do you think the trough probably occurred?

A: I don’t know yet. Probably sometime in the second or third quarter of 2009.

Q: You are not the only member of the Committee who has been saying that he thinks the recession is probably over.

A: Right. Our Chairman, Bob Hall, has been saying it for awhile as well.

Q: And private economists too?

A: Yes. But of course the Committee’s announcements always lag behind other economists. It is the price of waiting until we are sure.

Q: Do you think the economy looks good now?

A: It is very important to note that a trough could be described as “the economy is at rock bottom” as easily as the more positive-sounding characterization ”the recession is over.” A recession is defined as a period of declining economic activity, not a low level of economic activity. Unemployment, in particular, is still very high now, and will probably take a long time to get back to the levels we had become accustomed to. But I am more optimistic than many.

Q: Obviously you expressed in the Committee meeting last Thursday your view that the recession was probably over and others expressed their views that it wasn’t?

A: We have a standing rule not to characterize the views or remarks of others in our deliberations. And in this case I also am not revealing anything I said in the meeting.

Q: But there is a glaring difference between your views, particularly as expressed in your blogpost of April 5, which was widely reported, and the Committee’s public statement that it was too soon to call an end to the recession. Obviously there is a big gap between you and the majority of the Committee.

A: I can see how it looks that way, but there is not necessarily a gap anywhere near as large as you think. The decision is a matter of probabilities. There is, as always, a chance - greater than 1% – that the economy could go into a steep nose dive tomorrow. In that hypothetical and unlikely event, the Committee would have to decide whether the new downturn counted as a second recession, or whether it should be considered part of the recession of 2007-09.

In the latter case, we would have made a mistake if we had already declared a trough in 2009. We would have to retract the trough statement. This is an excellent argument for waiting until we can answer that hypothetical question more definitively. It is an argument I am comfortable with.

Q: Would it be so bad if the Committee had to revise the date of the trough after the fact?

A: We have never done it before. We explain adinfinitum that the role of the committee is to be definitive, not to be first, in calling turning points. Thus our raison d’etre would be undermined, a bit, if we got into the habit of revising dates after the fact.

Q: Another member of the Committee, Robert Gordon, is willing to say on the record that he disagrees strongly with the Committee’s decision to wait.

A: Yes, in fact he has now posted a dissenting statement. However, I would not say the same thing.

Q: Yet you went public before he did, with your view that the recession was probably over.

A: I have a blog.

Q: What role, if any, did fiscal stimulus play in ending the recession, if the final determination is that it did indeed end sometime in 2009?

A: In my view it helped a lot. True, the fiscal stimulus enacted February 2009 was not big enough to return us rapidly to full employment. Constraints arising both from party politics and from global financial markets (in light of the magnitude of the inherited debt) prevented it from exceeding $800 billion.

Nevertheless, I believe that the fiscal stimulus, together with Federal Reserve monetary policy and other important policy responses, was relatively well-designed (by the standards of most such efforts), was probably critical in heading off the risk of a Great Depression scenario, and contributed substantially to the end of the recession. Of course some observers disagree — mostly outside of the economics profession — in part because it is impossible to prove what would have happened without the stimulus.

Q: Real estate and banks were at the heart of the financial crisis. Do you think those two areas are now stable?

A: The crisis was remarkable in that the liquidity dried up in what were supposed to be the most liquid markets in the world. The malfunctioning of the interbank credit market was easily quantified by the tremendous increases in the TED spread and other measures of the premium that even the largest most secure banks had to pay in order to borrow. These spreads have returned to normal over the last year. Although one cannot rule out new shocks, and the construction sector in any case will recover only slowly, it is indeed fair to say that the financial sector where the crisis originated has stabilized.

Q: Was the 2007-2009 recession the worst since the Great Depression?

A: Yes. The early 1980s come close. In fact, if the criterion is the level of the unemployment rate rate then 1982 was worse than the current episode. But by the various other measures — increase in unemployment rate, loss of jobs, loss of output, length of recession — the 2007-09 recession was indeed the worst since the Great Depression.

Q: Would you call it the “Great Recession,” following the “Great Moderation?”

A: I never signed on to the Great Moderation. I feared it would not last long enough to merit the name. I also do not use the phrase Great Recession. But it was certainly a nasty one.

Disclosure: No positions, and the author's answers solely represent his own opinions