Business Cycle Dating Committee reluctant to identify trough

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This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The Business Cycle Dating Committee of the National Bureau of Economic Research, the official group in charge of identifying the beginning and end of recessions, indicated this morning that “the determination of the trough date on the basis of current data would be premature.” The trough date would identify the end of a recession and the beginning of an expansion. The same committee announced in December 2008 that the current recession commenced in December 2007. The committee waited an entire year to confirm before making the official announcement that a recession is underway because data are revised. The “how” and “what” and other questions of the identification process are the subject of today’s comment.

Economic indicators the committee tracks: The Business Cycle Dating Committee defines a recession as a “significant decline in 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.” Estimates of real GDP are published every quarter and are subject to revision. The Business Cycle Dating Committee uses four monthly indicators to determine the precise months of troughs and peaks. Real personal income excluding transfer payments, payroll employment, industrial production, and real sales of goods at the factory, wholesale, and retail stages are the four monthly indicators used to determine turning points of business cycles. The end of the last recession in November 2001 (the trough) was announced in July 2003. In this announcement, the committee noted that “there is no fixed rule about what weights are assigned to the various indicators, or about what other measures contribute information to the process.” It appears that the process involves judgment in the absence of clear cut signals. A brief overview of the nature of economic data prior to the July 2003 announcement should help to understand what needs to be visible in economic data before this committee officially identifies the trough date of the current business cycle.

The 2001 trough: On the eve of the announcement in July 2003, real GDP data for the first quarter of 2003 had been published. The committee cited that real GDP had risen 3.3% from the pre-recession peak in the fourth quarter of 2000 (see chart 1). 

Of the four preferred monthly economic indicators, real personal income excluding transfer payments and sales of goods at factory, wholesale and retail stages had exceeded their pre-recession peaks by July 2003 (see chart 2).

However, payroll employment and industrial production, the other two preferred indicators of the committee, were noticeable below their pre-recession levels (see chart 3).

In the opinion of the committee, the significant growth of real GDP ruled out the possibility that the recession was still underway and any new signs of weakness would be considered as a new recession, although payroll employment was still below the pre-recession peak. The 2001 upswing was a jobless recovery in hindsight and therefore the decreased emphasis on payrolls was justified.

The current situation:Fast forwarding to the present situation, current economic data do not present an air tight case to announce the trough of the business cycle. Following declines of real GDP in five out of the six quarters ended in the second quarter of 2009, real GDP has increased in the third and fourth quarters of 2009 (see chart 4) and is projected to show gains in all of 2010.

The level of real GDP in the fourth quarter of 2009 is 2.0% below the peak of the second quarter of 2008 (see chart 5).

Among the preferred four monthly economic indicators, real personal income less transfer payments and real factory, wholesale-retail sales are both significantly below their respective pre-recession peaks as of this writing (see chart 6).

Payroll employment appears to have established a bottom in February 2010, although this is subject to revision. Industrial production has turned around but it is still many months away from surpassing the pre-recession peak (see chart 7).

Chart 5-7 suggest that it is “premature” to call the end of a recession from the point of view of the keepers of economic history. The committee wishes to err on the side of caution as renewed economic weakness could result in a dip of these economic indicators indicating that the recession is still underway. It is a wise choice given the depth, duration, and wide reach of the current recession, notwithstanding the uncertainty attached to data revisions. In other words, the committee needs to confirm its judgment such that it does not have to revise the date based on newly available information. Although the Fed and the Business Cycle Dating Committee are two distinctly independent bodies, today’s cautious announcement gives the Fed room and prevents a controversial situation. Has the recession ended? Yes, for all practical purposes, the economy had turned around in the middle of 2009 but it is still in the recovery phase and is yet to move on to the expansion phase. Some members of the committee hold this opinion and others have concerns about the durability of the improvement. It is understandable that the committee has postponed the announcement that a recovery is here for purely scientific reasons.

Source: Northern Trust – Daily Global Commentary, March 12, 2010.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

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