Italians and the world have now been told that their economy slipped back into recession in the first half of 2014. This characterization is based on the criterion for recession that is standard in Europe and most countries: two successive quarters of negative growth. But if the criteria for determining recessions in European countries were similar to those used in the United States, this new downturn would be a continuation of the 2012 recession in Italy, not a new one. A common-sense look at the graph below suggests the same conclusion: the 2013 “recovery” is barely visible.
Widespread recent reports have trumpeted: “China to overtake US as top economic power this year.” The claim is basically wrong. The US remains the world’s largest economic power by a substantial margin.
The story was based on the April 29 release of a report from the ICP project of the World Bank: “2011 International Comparison Program Summary Results Release Compares the Real Size of the World Economies.” The work of the International Comparison Program is extremely valuable. I await eagerly their latest estimates every six years or so and I use them, including to look at China. (Before 2005, the data collection exercise used to appear in the Penn World Tables.)
This morning’s US employment report shows that July was the 34th consecutive month of job increases. Earlier in the week, the Commerce Department report showed that the 2nd quarter was the 16th consecutive quarter of positive GDP growth. Of course, the growth rates in employment and income have not been anywhere near as strong as we would like, nor as strong as they could be if we had a more intelligent fiscal policy in Washington. But the US economy is doing much better than what most other industrialized countries have been experiencing. Many European countries haven’t even recovered from the Great Recession, with GDPs currently still below their peaks of six years ago.
There is a danger that some investors will lose sight of the purpose of a benchmark index. The benchmark exists to represent the views of the median investor dollar. For many investors, going with the benchmark is a good guideline – especially those who recognize themselves to be relatively unsophisticated and also those who think they are sophisticated but really aren’t. This is the implication of the Efficient Markets Hypothesis (EMH), for example.
This morning the Bureau of Economic Analysis released its first estimate for 2011 GDP. It showed national output for the first time surpassing the pre-recession peak, which occurred in the last quarter of 2007. (See chart below) The expansion in 2011 was led by autos, computers, and other manufactured goods.
Given that the economy hit its trough in mid-2009, the long slow climb since then has been disappointing. The outcome turns out to have been worse than the conventional wisdom that sharp declines tend to be followed by sharp recoveries. On the other hand, the outcome turns out to have been somewhat better than the Reinhart-Rogoff thesis that when the cause of a recession is a financial crisis, the recovery tends to take many years.
The NBER‘s Business Cycle Dating Committee, of which I am a member, announced this morning that June 2009 was the trough of the recession that began in December 2007. It was the longest recession since the 1930s.
It is the fate of the Committee to be teased mercilessly every time we make one of our formal declarations of a turning point in the economy. We get it from both directions: We waited too late to call the end of the recession, or we did it too early. (Occasionally someone makes both criticisms simultaneously!) Even The Daily Show got in on the fun this time.
On July 31, the Department of Commerce’s BEA (Bureau of Economic Analysis) released an important set of numbers regarding GDP.Of most immediate interest, the advance estimate of GDP growth for the second quarter, April-June, 2009, was a very moderate -1 per cent per annum.The small magnitude of this negative number confirms an inflection point in the second quarter.As most of us had already thought, the economy is no longer in the free-fall of October 2008 to March 2009 — when the rate of output contraction was approximately 6% per annum – but, rather, is beginning to level out.
Furthermore, the figures reveal large depletion of inventories in the second quarter, which offers good grounds for hope that firms will begin to produce more in the second half of the year.In other words, the economy is probably bottoming out even as we speak.
But even if it turns out that the NBER Business Cycle Dating Committee eventually puts the trough sometime in the 2nd half of 2009, it will not make that decision until all the facts are in, which will be a long time.A major reason is that government statistics, especially for GDP, are always revised subsequently.That brings us to the other big component of the BEA release on Friday:comprehensive revisions to the GDP numbers going back many years.The BEA does a comprehensive revision generally every five years. In this case the statistics were substantially affected, especially those over the last dozen years, as the results of a number of permanent changes in methodology (such as how natural disasters are treated in the accounts).
These revisions produced two interesting implications for the current recession, quite aside from the question whether it is now ending.
First, the recession turns out to have been worse than the previous GDP numbers indicated.During the course of 2008, the economy apparently contracted 1.9%, more than double the previous estimate of 0.8%.The cumulative decline through the 2009 Q-I now appears to have been 2.8% (as compared to the previously reported 1.8%).Add in the latest quarter, and the 3% cumulative decline cements the claim of this recession to be the worst since the 1930s.
Second, that revision includes a conversion of the +0.9% that was previously reported for the first quarter of 2008 to the new estimate for that quarter: -0.7%.
That is important from the viewpoint of the NBER Business Cycle Dating Committee.Why?All through 2008 it was difficult to tell whether a recession had started at the end of 2007. On the one hand, some measures such as employment and real income had peaked then,but on the other hand it appeared that GDP had continued to grow in early 2008.Even after the accelerated deterioration in the autumn of 2008, when it could no longer be doubted that the economy was in recession, the signals as to the date of its beginning still conflicted.
The Committee ended up, on December 1, 2008, declaring that the peak had occurred in December 2007.As always, there were critics.Some didn’t see how we could declare that a recession had begun six months before GDP growth turned negative.“Everybody knows that a recession is defined as two consecutive negative quarters”(More common, as usual, was the precisely opposite critique:“The NBER is just now saying what has long been obvious to everyone but them.”)
The new report from the BEA that the first quarter of 2008 was negative after all is thus another piece of evidence that validates the choice of end-2007 as the business cycle peak.Similarly, it validates the decision by the Committee to have made the call in December, rather than waiting for the BEA revisions of July 31, 2009.
The bottom line of all of this?We are less at sea than we had feared.The data now tell a story that is fairly well delineated, the story of a recession that, though upsettingly severe in amplitude, appears familiarly sinusoidal in shape.
(This post does not necessarily represent the views of the NBER Business Cycle Dating Committee or its members.Nor of the BEA or its Advisory Committee members.)
The Commerce Department this morning announced its advance estimate of last quarter’s real GDP. As expected, the estimate shows that GDP fell in the first quarter of 2009 — by a hefty 6.1 per cent at an annual rate. An implication is that the current recession has just tied the post-war record for longevity.
The previous record-holders were the recessions of 1973-75 and 1981-82, each of them five quarters in length according to the official NBER chronology. In the current downturn, the NBER’s Business Cycle Data Committee determined that the economy peaked in the 4th quarter of 2007. Although the Committee won’t declare the trough of the recession until well after the fact, and the trough could well be a ways off, a negative 1st quarter of 2009 almost certainly means that the five-quarter benchmark has now been attained. (The Commerce Department often revises its GDP figures substantially between the advance estimate and the final number, and we are due for major backward-looking revisions in July. Indeed that is one reason why the NBER always waits so long to issue its findings. In the past, the size of the average revision has been just over 1 percentage point, whether up or down. It is highly unlikely that future revisions will change this morning’s negative number into a positive one.)
Is the United States in recession?If one looked solely at the adverse shocks that have hit the economy over the last year, one would infer an unusually high probability of a recession.If one consulted some of the most import economic measures over the last year, one would say the country clearly entered a recession last January.If one gauged the popular mood, one would hear, “Of course we are in recession !”
The one criterion that has been missing is the one criterion that people most commonly have in their minds as the definition of a recession:two consecutive quarters of negative growth.This morning, October 30, the Commerce Department released the advance estimate of GDP for the 3rd quarter.It showed a decline. The decline was small: just 0.3 per cent at an annual rate; and it is only one quarter, not yet two. But at this point there can be little doubt that we are really truly in recession.