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Note: This commentary has been revised to include Monday's release of September Real Personal Income Less Transfer Payments. The next Big Four will be Friday's Nonfarm Employment.


Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.

There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:

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  • Industrial Production

  • Real Income
    (excluding transfer payments)

  • Employment

  • Real Retail Sales

The weight of these four in the decision process is sufficient rationale for the St. Louis Fed repository to feature a chart four-pack (FRED) of these indicators along with the statement that "the charts plot four main economic indicators tracked by the NBER dating committee." In his July 10th Bloomberg TV interview, ECRI's Lakshman Achuthan cites these four in his remarks. He says, and I quote "When you look at those four measures, they are rolling over." On September 13th, Achuthan again reappeared on Bloomberg TV and reasserted the ECRI recession call, stating again that the U.S. is already in recession and that future revisions to the data will support their call. See the last 30 seconds of the interview for comments on downward revisions.

Are these indicators really rolling over? First, here are the four as identified in the Federal Reserve Economic Data repository. See the data specifics in the linked PDF file with details on the calculation of two of the indicators.

The FRED charts are excellent. They show us the behavior of the big four indicators currently (the green line) as compared to their best, worst and average behavior across all the recessions in history for the four indicators (which have start dates). Their snapshots extend from 12 months before the June 2009 recession trough to the present.

The Latest Indicator Data

The latest updates to the Big Four was today's release of the September Real Personal Income Less Transfer Payments (the red line in the chart below), which fell 0.1% over the previous month following a 0.2% decline the month before. The mainstream press follows nominal personal income, which for September met analysts' expectations of a 0.4% rise. But adjusted for inflation and excluding social benefits (Social Security, Welfare, Veteran's benefits, etc.), the recent trend in personal income is a bit troubling.

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As the average of the Big Four indicates (the gray line), economic expansion since the last recession was flat or contracted during three of the nine months in 2012. The average for August, down 0.3%, was the sharpest month-over-month decline of the 2012. The average for September is a welcome improvement. The data, of course, are subject to revision, so we must view these numbers accordingly. When ECRI's Achuthan made his July assertion that the indicators were rolling over, the data didn't appear to support the claim. The August data was indeed weak, but September has shown strength, with personal consumption, measured by Real Retail Sales, as the backbone of improvement. Personal Consumption Expenditures accounts for about 70% of GDP (illustrated here).

Background Analysis: The Big Four Indicators and Recessions

The charts above don't show us the individual behavior of the Big Four leading up to the 2007 recession. To achieve that goal, I've plotted the same data using a "percent off high" technique. In other words, I show successive new highs as zero and the cumulative percent declines of months that aren't new highs. The advantage of this approach is that it helps us visualize declines more clearly and to compare the depth of declines for each indicator and across time (e.g., the short 2001 recession versus the Great Recession). Here is my own four-pack showing the indicators with this technique.

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Now let's examine the behavior of these indicators across time. The first chart below graphs the period from 2000 to the present, thereby showing us the behavior of the four indicators before and after the two most recent recessions. Rather than having four separate charts, I've created an overlay to help us evaluate the relative behavior of the indicators at the cycle peaks and troughs. (See my note below on recession boundaries).

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The chart above is an excellent starting point for evaluating the relevance of the four indicators in the context of two very different recessions. In both cases, the bounce in Industrial Production matches the NBER trough while Employment and Personal Incomes lagged in their respective reversals.

As for the start of these two 21st century recessions, the indicator declines are less uniform in their behavior. We can see, however, that Employment and Personal Income were laggards in the declines.

Now let's look at the 1972-1985 period, which included three recessions -- the savage 16-month Oil Embargo recession of 1973-1975 and the double dip of 1980 and 1981-1982 (6-months and 16-months, respectively).

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And finally, for sharp-eyed readers who don't mind squinting at a lot of data, here's a cluttered chart from 1959 to the present. That is the earliest date for which all four indicators are available. The main lesson of this chart is the diverse patterns and volatility across time for these indicators. For example, retail sales and industrial production are far more volatile than employment and income.

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Are the Big Four Rolling Over?

As of the latest data, they are potentially showing some early signs of rolling over. Industrial Production and Real Income are off their 2012 highs, and Nonfarm Employment growth has been excruciatingly slow. Real Retail Sales, the most volatile of the four, is the only one exhibiting strong growth over the past three months.

History tells us the brief periods of contraction are not uncommon, as we can see in this big picture since 1959, the same chart as the one above, but showing the average of the four rather than the individual indicators.

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The chart clearly illustrates the savagery of the last recession. It was much deeper than the closest contender in this timeframe, the 1973-1975 Oil Embargo recession. While we've yet to set new highs, the trend has collectively been upward. But a closer look at the average shows a clear slowing of the trend in 2012.

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The behavior of all four of these indicators will be critical for the fourth quarter, which includes the all-important 2012 holiday season.


Appendix: Chart Gallery with Notes

Each of the four major indicators discussed in this article are illustrated below in three different data manipulations:

  1. A log scale plotting of the data series to ensure that distances on the vertical axis reflect true relative growth. This adjustment is particularly important for data series that have changed significantly over time.

  2. A year-over-year representation to help, among other things, identify broader trends over the years.

  3. A percent-off-high manipulation, which is particularly useful for identifying trend behavior and secular volatility.

Industrial Production

The U.S. Industrial Production Index (INDPRO) is the oldest of the four indicators, stretching back to 1919. The log scale of the first chart is particularly useful in showing the correlation between this indicator and early 20th century recessions.

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Real Personal Income Less Transfer Payments

This data series is computed as by taking Personal Income (PI) less Personal Current Transfer Receipts (PCTR) and deflated using the Personal Consumption Expenditure Price Index (PCEPI). I've chained the data to the latest price index value.

The "Tax Planning Strategies" annotation refers to shifting income into the current year to avoid a real or expected tax increase.

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Total Nonfarm Employees

There are many ways to plot employment. The one referenced by the Federal Reserve researchers as one of the NBER indicators is Total Nonfarm Employees (PAYEMS).

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Real Retail Sales

This indicator is a splicing of the discontinued retail sales series (RETAIL, discontinued in April 2001) spliced with the Retail and Food Services Sales (RSAFS) and deflated by the Consumer Price Index (CPIAUCSL). I used a splice point of January 1995 because that was the date mentioned in the FRED notes. My experiments with other splice techniques (e.g., 1992, 2001 or using an average of the overlapping years) didn't make a meaningful difference in the behavior of the indicator in proximity to recessions. I've chained the data to the latest CPI value.

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Note: I represent recessions as the peak month through the month preceding the trough to highlight the recessions in the charts above. For example, the NBER dates the last cycle peak as December 2007, the trough as June 2009 and the duration as 18 months. The "Peak through the Period preceding the Trough" series is the one FRED uses in its monthly charts, as explained in the FRED FAQs illustrated in this Industrial Production chart.

Source: The Big 4 Economic Indicators: Real Personal Income Less Transfer Payments