Tuesday, September 21, 2010

So that's it for the Great Recession?

On September 20th, 2010, the National Bureau of Economic Research (NBER), a Cambridge Massachusetts-based "private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works" released its report on the most recent recession (also referred to as the Great Recession). The NBER, founded in 1920, "is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community."

According to the Business Cycle Dating Committee of NBER, a trough in United States' business activity occurred in June 2009, marking the end of the recession that began in December 2007; the nadir of this trough marked the beginning of an economic expansion. From NBER's calculations, the most recent recession lasted 18 months making it the longest recession since the end of World War II. Prior to this most recent recession, the other longest recessions from 1973 to 1975 and 1981 to 1982 had durations of 16 months. This report follows this reportwhich stated that the peak in United States economic activity from the expansion that began in November 2001 occurred in December 2007, an expansion that lasted 73 months compared to 120 months for the previous expansion that took place in the 1990s.

I think that a quote from NBER would best explain exactly why and how they define the end of the recession:

"In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date." (my bold)

Here are the indicators NBER used to define the economic trough:

Macroeconomic Advisers’ monthly GDP (June)
The Stock-Watson index of monthly GDP (June)
Their index of monthly GDI (July)
An average of their two indexes of monthly GDP and GDI (June)
Real manufacturing and trade sales (June)
Index of Industrial Production (June)
Real personal income less transfers (October)
Aggregate hours of work in the total economy (October)
Payroll survey employment (December)
Household survey employment (December)

So basically, NBER is telling us that if the economy should fall into what some economists term a "double-dip recession", the second half of the "dip" would be a brand spanking-new recession. In fact, NBER does not even recognize the concept of a double-dip recession.

I do find it interesting that NBER does assess the duration of the contraction during the Great Depression to be 43 months from its peak in August 1929 to its trough in March 1933. Is it not possible that, if the economic data that NBER used for the 2007 - 2009 recession is revised downward in the future, that the length of this recession could approach that of the Great Depression?

Let's take a look at unemployment statistics from the Shadow Government Statistics website. I really like their viewpoint because they graphically display the U3 and U6 data together on one chart:
For those of you who aren't aware of the differences between U3 and U6, here are the definitions taken from the United States Bureau of Labor Statistics (BLS):

U3 - Total unemployed as a percent of the civilian labor force (official unemployment rate).
U6 - A broader measure summing the total unemployed, plus all persons marginally attached to the labor force plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.

BLS defines persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, part of the marginally attached, have given a job-market related reason for not currently looking for work. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

Here are the latest statistics from the BLS website:

Yes, I do realize that unemployment is a lagging indicator. Try explaining that to the 14.86 million unemployed, millions of underemployed Americans, the 2.3 million households that have lost their homes through foreclosure and the million households that are in the process of losing their homes. I'm certain that the 9.6% of Americans who are unemployed (U3) and the 16.7% of workers who are part of the U6 broader statistic would agree with NBER; the recession is definitely in the past....for those who actually have full-time, well-paying jobs.

This recession could not have "ended" at a better time. With the United States public debt reaching $13.47 trillion, the American government could not afford to increase stimulus to spend its way out of a recession that was any lengthier. Fortunately, the interest on our public debt is still smaller than the GDP of the top 22 countries in the world at only $395 billion for the first 11 months of fiscal 2009 - 2010. I wonder if the government will have the ability to spend its way out of the next economic debacle? With an ever mounting debt and deficits, it's going to be a lot tougher for the next President to stimulate his or her way out of a recession.

While I realize that academics studying economics need to have the ability to define economic cycles, I would say that those of us dwelling in the real world would not say that the latest recession is over by any reasonable definition.

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