NBER Committee Holds Off Declaring Recession’s 2009 End Until It is Sure

The NBER Business Cycle Dating Committee this morning posted an announcement that it had met in person April 8 – an infrequent event – but 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, […]

The NBER Business Cycle Dating Committee this morning posted an announcement that it had met in person April 8 – an infrequent event – but 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, for stories that appeared today, 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, 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?  

A:   No.  

Q:   Shouldn’t the announcement be interpreted as suggesting that we are still in the recession?

A:   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, for one, 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, because so many have been out of work for more than a year.  But I am more optimistic about this year than many are.

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 over and over 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.  But 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 did fiscal stimulus, if any, play in ending the recession, assumng 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.


Again, in each of these answers I speak only for myself.

Job Market Confirms End of Recession

The recession is over.   The last piece has fallen into place, with the BLS announcement that employment rose in March.
Identifying the beginnings and ends of recessions has been difficult in recent decades because the two most important indicators, output and employment, have sometimes behaved differently from each other.  Most notoriously, in the recovery that began in […]

The recession is over.   The last piece has fallen into place, with the BLS announcement that employment rose in March.

Identifying the beginnings and ends of recessions has been difficult in recent decades because the two most important indicators, output and employment, have sometimes behaved differently from each other.  Most notoriously, in the recovery that began in November 2001, employment lagged far behind economic growth.  If one had gone by the labor market, one might have called it a three year recession.  But if one had gone by GDP, one might have wondered whether there was a recession at all.

This time around, the difficulty is not so great.   True, the magnitude of job loss after December 2007 was unparalleled since the 1930s.  It was severe even relative to the loss of GDP.    And the unemployment rate remains extremely high.   But contrary to some impressions, the labor market in this recovery has not lagged unusually far behind the rest of the economy.   It always lags behind somewhat:  due to costs of search, hiring and training, firms wait until the recovery is reasonably well established before adding workers to the payroll.    But by either of two criteria, the lag has not been unusually long this time.  First, the three months of greatest job loss virtually coincided with the three months of greatest output loss, in the first quarter of 2009, as was also the case in the 1991 and 2001 recessions.  (See graphs below.)   By July 2009, job market indicators were showing their first tentative signs of life.   Second, with the latest figures, employment changes have now turned positive.  This is the more definitive criterion, because a recovery is defined as a period of increasing economic activity.   The nine month wait was painful.  But the lag between positive income growth (June 2009) and positive job growth (March 2010) turned out to be shorter than in the preceding two recessions (one to two years).

Another economic indicator is particularly helpful in making sense of these cycles:  real income.  In theory, income should be the same as GDP.  (The value of all goods and services sold is equal to the value of all income received in their sale.)  In practice, surprisingly large statistical errors create a gap.  Statistical experts say that the production side (GDP) is not necessarily more accurate than the income side.  National income is shown as a dotted line in the bottom graph. In the last three cycles, including 2001, the income measure has behaved a little more consistently than the GDP measure:  plunging along with employment as the recession begins.  Subsequent revisions in the GDP statistics have moved a bit in the direction of the initial numbers for national income, employment and the other indicators, rather than the other way around.

Click here for enlargement of monthly graph (2000-2010).
The source for monthly GDP is the estimates by Macroeconomic Advisers, LLC.
(Three-month moving average is centered: The last observation, at Feb. 2010, averages Jan-March.)

Click here for enlargement of quarterly graph (1990-2010).


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Red States, Blue States and the Distribution of Federal Spending

April 1 is Census Day. Evidently Glenn Beck and Michele Bachmann have been encouraging Americans to boycott the census — to refuse to fill out the whole form. This protest follows from their small government ideology.

I am not always sure what they, or Republicans, or Tea Party participants mean by small government. They say they want a government that intervenes less in the economic sphere. Perhaps they don’t like the idea that the census numbers are used, among other things, to determine the allocation of federal spending across states, because they don’t think it is the business of the government to redistribute income. That is “socialism.” Even “Stalinism.”

A virtue of the Tea Party movement is that many of its members are engaging in national politics for the first time. It occurred to me that they might be able to use some help figuring out the lay of the land, and so I thought I would pursue a little research on their behalf. The question is geographical redistribution: which states receive subsidies from the federal government, and which other states are taxed to provide those subsidies. One might be able to sympathize with the feeling of those living in the heartland of the country that they should not have to subsidize the northeastern states through, for example, federal housing programs. True, the cost of housing, food, and other living expenses is much higher in the coastal cities, compared to the South or Midwest; but it isn’t the job of the federal government to smooth out geographical variation in real income. Furthermore the coastal residents could always move if they don’t like their high cost of living. Given the big budget deficit problem that we will have to solve in the near future, knowing which states are receiving more than their fair share of handouts should help us know where to cut spending.

The accompanying chart contains 50 data points, one for each state. The data are from 2005, the most recent year available. One axis ranks states by the ratio of income received by that state from the federal government, per dollar of tax revenue paid to the federal government. Personally, I think the “red state / blue state” distinction is overdone. But to capture the widely felt tension between the heartland and the coastal urban centers, I have put on the other axis the ratio of votes for the Republican candidate versus the Democratic candidate in the most recent presidential election.

It will come as a surprise to some, but not to others, that there is a fairly strong statistical relationship, but that the direction is the opposite from what you would think if you were listening to rhetoric from Republican conservatives: The red states (those that vote Republican) generally receive more subsidies from the federal government than they pay in taxes; in other words they are further to the right in the graph. It is the other way around with the blue states (those that vote Democratic).

One reason is that the red states on average have lower population; thus their two Senators give them higher per capita representation in Washington than the blue states get, which translates into more federal handouts. As an example, the Pentagon has long wanted to shut down some military bases and discontinue some weapons systems that it does not regard as sufficiently useful, but is blocked by Senators or congressmen from the relevant districts; indeed defense contractors famously locate their factories in the districts of powerful congressmen for precisely this reason.

The top ten feeders at the federal trough in 2005 were: New Mexico, Mississippi, Alaska, Louisiana, West Virginia, North Dakota, Alabama, South Dakota, Kentucky and Virginia. (Sarah Palin’s home state of Alaska ranks number one if measured in terms of federal spending per capita. Alabama Senator Shelby evidently gets goodies for his state, ranked 7, by indiscriminately holding up votes on administration appointments.) The top ten milk cows were: New Jersey, Nevada, Connecticut, Minnesota, Illinois, Delaware, California, New York, and Colorado.

Perhaps in determining how the federal government redistributes income across states one should view its role more expansively than is captured in the budget numbers. In the western states there are federal water projects that subsidize water for farmers, artificially low grazing fees for ranchers, and leases for hard rock mining and oil drilling on federal lands that have historically charged artificially low prices. Perhaps the biggest federal redistribution program of all is massive agricultural subsidies. The four congressional districts that receive the most in farm subsidies are all represented by “conservative” Republicans, located in Nebraska, Kansas, Iowa, and Texas. (Michele Bachmann’s family farm apparently received $250,000 in such farm payments between 1995 and 2006.)

The most commonly ignored area of geographical redistribution is the federal government’s permanent policy of “universal service” in postal delivery, phone service and other utilities (electricity; perhaps now broadband…). Universal service means subsidizing those who choose to live in remote places like Alaska, where the cost of supplying these services is much higher than in the coastal cities. Perhaps they should move…

If I were cynical, I might suspect that the reason that Glenn Beck, Michele Bachmann, and some Republicans are not enthusiastic about getting the most accurate numbers possible, from the census and otherwise, is that they don’t want people to know who is getting federal handouts and who is paying. But, more likely, the truth is that they don’t want to know themselves.

Click here for .pdf enlargement of graph.
Data sources: The Tax Foundation and Atlas of US Presidential Elections.