Tag Archives: recession

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 Has Italy Really “Gone Back Into Recession”?

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.

Worse, Italy under U.S. standards would probably be treated as having been in the same horrific six-year recession ever since the shock of the global financial crisis in 2008:  the recovery in 2010-11 was so tepid that the level of Italian economic output had barely risen one-third the way off the floor, before a new downturn set in during 2012.  And the two earlier downturns were severe:  Italy’s GDP remains 9% below the level of 2008.

  Graph of real GDP in Italy, 2007 (Q1) – 2014 (Q2)  

Italy Real GDP

What is the difference in criteria?   Economists in general define a recession as a period of declining economic activity.   European countries, like most, use a simple rule of thumb:  a recession is defined as two consecutive quarters of falling GDP.    In the United States, the arbiter of when recessions begin and end is the NBER Business Cycle Dating Committee.  The Committee does not use that rule of thumb, nor any other quantifiable rule, when it declares the peaks and troughs of the US economy.   When it makes its judgments it looks beyond the most recently reported GDP numbers to include a variety other indicators, in part because output measures are subject to errors and revisions.

Furthermore the Committee sees nothing special in the criterion of two consecutive quarters.  For example, it generally would say that a recession had taken place if the economy had fallen very sharply in two quarters, even if there had been one intermediate quarter of weak growth in between the other two quarters.  Further, if a trough is subsequently followed by several quarters of positive growth the NBER Committee does not necessarily announce that the recession has ended, until the economy has recovered sufficiently well that a hypothetical future downturn would count as a new recession instead of a continuation of the first one.

Fortunately, the US economy has had positive economic growth for the last five years, so these issues are not currently active on our side of the Atlantic.   But things are not always so quiet.   The US economy contracted three quarters in a row in 2001, for example, measured with the revised GDP statistics that are available today.  But at the time when the NBER committee declared that there had been a recession in 2001 (based on various other indicators, particularly employment and the income-based measure of GDP), the official demand-based GDP statistics did not show two consecutive quarters of declining output, let alone three.  That episode is a good illustration of the benefits of a broader approach to the task of declaring business cycle turning points.  The NBER Committee has never yet found it necessary revise a date, let alone erase a recession, once declared.

One cannot say that the two-quarter rule of thumb used by individual countries in Europe and elsewhere is “wrong.”   There are unquestionably big advantages in having an automatic procedure that is simple and transparent, especially if the alternative is delegating the job to a committee of unelected unaccountable ivory-tower economists.   The press statements of the NBER Committee are seldom greeted appreciatively.  Each time, many critics express puzzlement at the need for a secretive committee, as compared to the alternative of an objective two-quarter rule.  (Other critics each time complain that the committee has “only said what everybody has known for a long time.”  Some critics have managed both complaints simultaneously — even when the two-quarter rule would not have given this answer that “everybody knows.”)

But there are also disadvantages to the rule of thumb.  One disadvantage is the need to get out the white-out when the statistics are revised, as Britain had to do a year ago when its reported recession of 2011-12 was revised away.  Claims that in 2012 had appeared in the speeches of UK politicians and in the writings of researchers, made in good faith at the time, were rendered false in 2013.

There is also a potentially more far-reaching and serious disadvantage. Citizens in Italy have now been given the impression that they have entered a new recession.  Voters may draw the conclusion that their new political leaders must have done something wrong.   But the picture is different if Italy has been in the same recession for six years.  The implication may be that the leaders have been doing the same wrong things throughout that period.   It’s not an unimportant difference.

The loss in output since 2008 means that the debt/GDP ratio in Italy has risen during this period of fiscal austerity, not reversed as was supposed to happen under the plans to restore debt sustainability.  The same is true of other countries in the European periphery, making investor enthusiasm for their bonds over the last two years puzzling.

What are the right policies to get Italy and the others growing again?  The answer is the same as it has been for the last six years.  At the FrankfurtBerlin-Brussels level, ease rather than austerity and deflation.  At the Rome-Lisbon-Athens level, reforms on the supply side, especially in labor markets.  It is true that supply-side reforms take time to have their full effect.  But if authorities in Italy started handing out more taxi licenses to (qualified) drivers, employment would go up within a week.


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The Fiscal Stimulus & Market Turnaround: 5-Year Anniversary

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Commentators are taking note of the five-year anniversary of the fiscal stimulus that President Obama enacted during his first month in office.   Those who don’t like Obama are still asking “if the  fiscal stimulus was so great, why didn’t it work?”    What is the appropriate response?

Those who think that the spending increases and tax cuts were the right thing to do have given a number of responses, which sound a bit weak to me.  The first is that the stimulus wasn’t big enough.  The second was that the Great Recession would have been much worse in the absence of the stimulus, perhaps a replay of the Great Depression of the 1930s.  (The media are fond of this line of reasoning because it allows them to escape making a judgment.  They can just say “nobody knows what would have happened otherwise.”)    The third response is that the fiscal stimulus was short-lived, and in fact was reversed by the Congress by 2010.

I believe that each of these three statements is true.   But they sound weak because they look like attempts to explain away the absence of a visible positive impact.  Listening to these arguments,  one would think that no effect of the Obama stimulus could be seen by the naked eye in the U.S. economic statistics of 2009.    Nothing could be further from the truth.

Recall the timing.  Obama was sworn in on January 20, 2009. The economy and financial markets had been in freefall ever since the Lehman Brothers failure four months earlier (September 15).   The President quickly proposed the American Recovery and Reinvestment Act, got it through Congress despite strong Republican opposition, and signed it into law on February 17.   

If one judges by the economic statistics, the effect could not have been much more immediate, whether the crierion is job loss, GDP, or financial market indicators.   Look at the graphs below.  

The stock market, which had been falling steeply since September, hit bottom on March 9, 2009, and then started a 5-year upward trend.   The index shown in Figure 1 is the S&P 500.  The turnaround can’t be missed.  Wall Street should get ready to celebrate the anniversary on March 9.

Figure 1








Figure 1: Stock Market   
*Click on the chart for larger image

The much-maligned TARP and bank stress-tests also played important roles, unfreezing financial markets.  Bank interest rate spreads were back to pre-Lehman levels by February 2009 and back to pre-subprime-crisis levels by June.

What about the real economy?  That is what matters, after all.   Economic  output was in veritable freefall in the last quarter of 2008: a shattering 8.3 % p.a. rate of decline (BEA).  More specifically, the maximum rate of contraction came in December 2008, according to the monthly GDP estimates from the highly respected MacroAdvisers.   (For charts in the form of growth rates, see Figures 1 and 2 of my post on the 3-year anniversary.)  The free-fall stopped in the first quarter of 2009.   As the GDP graph below shows, economic activity was flat, scraping along the bottom until June, after which growth resumed.   The official end  of the recession thus came in June.   Visible to the naked eye.









Figure 2: Level of GDP, monthly(Dec.2006-Dec.2013)
estimated by Macroeconomic Advisers
*Click on the chart for larger image

The rate of job loss bottomed out in March 2009.  It is there for anyone to see.   The graph shows private sector employment changes.  Thus the turnaround does not count government jobs directly created by the fiscal stimulus.  Job creation turned positive after the end of the year.  Since then, though employment gains have been much too slow, they have on average exceeded the rate during the corresponding period under George W. Bush.

 Figure 2

Figure 3: Change in Private Sector Employment
*Click on the chart for larger image

Of course there are always a lot of things going on. One cannot say for sure what was the effect of the Obama stimulus. And one can debate why the pace of the expansion slowed after 2010. (My own prime culprit is the switch to fiscal austerity.)

But whether looking at indicators of economic activity, the labor market, or the financial markets, the idea that the fiscal stimulus of February 2009 had no apparent impact in the numbers is wrong.

[Comments can be posted at the Econbrowser version or in the always-lively debate at Economist’s View.]

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One Recession or Many? Double-Dip Downturns in Europe

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The recent release of a revised set of GDP statistics by Britain’s Office for National Statistics showed that growth had not quite, as previously thought, been negative for two consecutive quarters in the winter of 2011-12.  The point, as it was reported, was that a UK recession (a second dip after the Great Recession of 2008-09) was now erased from the history books — and that the Conservative government would take a bit of satisfaction from this fact.    But it should not.    

Similarly, in April of this year, Britain was reported to have narrowly escaped a second quarter of negative growth, and thereby escaped a triple dip recession.   But it could have saved itself the angst.

The right question is not whether there have been double or triple dips; the question is whether it has been the same one big recession all along.  As the British know all too well, their economy since the low-point of mid-2009 has not yet climbed even halfway out of the hole that it fell into in 2008:  GDP (Gross Domestic Product, which is aggregate national output) is still almost 4% below its previous peak, as the first graph shows.   If the criteria for determining recessions in European countries were similar to those used in the United States, the Great Recession would probably not have been declared over in 2009 in the first place.   

Recent reports that Ireland entered a new recession in early 2013 would also read differently if American criteria were applied.  Irish GDP since 2009 has not yet recovered more than half of the ground it lost between the peak of late-2007 and the bottom two years later.  Following US methods, the end would not yet have been declared to the initial big recession in Ireland.   As it is, a sequence of tentative mini-recoveries have been heralded, only to give way to “double-dips.” 

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