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. Three of out five were negative, yet 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 precise 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 indentify 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 year, 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–right in the middle of the second quarter. 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 uses but 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 stock market has evolved as 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-ticket 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 started to hit everyone.

Posted by on November 12th, 2008 at 12:58 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.