The End of a Recession… And Where We’re Going
The End of a Recession… And Where We’re Going
There seems to be some misunderstanding among most people about what constitutes the “end of a recession.” The end, or the trough, does not signify all is well, or even that everything is improving. The best description for the end of a recession comes from the NBER, the official arbiter of recessions (and their ends). I’d like to quote from the report they put out about the end of the last recession, since I think our “recovery” is going to look a lot like that one. Note that the call was made in July of 2003, and the recession ended in November of 2001.
So here’s what the NBER said when they made the call. Note that I’ve taken the liberty of emphasizing a few points:
CAMBRIDGE July 17 — The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in November 2001. The trough marks the end of the recession that began in March 2001 and the beginning of an expansion. The recession lasted 8 months, which is slightly less than average for recessions since World War II.
In determining that a trough occurred in November 2001, 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 waited to make the determination of the trough date until it was confident that any future downturn in the economy would be considered a new recession and not a continuation of the recession that began in March 2001. The committee noted that the most recent data indicate that the broadest measure of economic activity-gross domestic product in constant dollars-has risen 4.0 percent from its low in the third quarter of 2001, and is 3.3 percent above its pre-recession peak in the fourth quarter of 2000. Two other indicators of economic activity that play an important role in the committee’s decisions-personal income excluding transfer payments and the volume of sales of the manufacturing and wholesale-retail sectors, both in real terms-have also surpassed their pre-recession peaks. Two other indicators the committee focuses on-payroll employment and industrial production-remain well below their pre-recession peaks. Indeed, the most recent data indicate that employment has not begun to recover at all. The committee determined, however, that the fact that the broadest, most comprehensive measure of economic activity is well above its pre-recession levels implied that any subsequent downturn in the economy would be a separate recession.
Identifying the date of the trough involved weighing the evidence provided by the behavior of various indicators of economic activity. The estimates of real GDP issued by the Bureau of Economic Analysis of the U.S. Department of Commerce are only available quarterly. Further, macroeconomic indicators are subject to substantial revisions and measurement error. For these reasons, the committee refers to a variety of monthly indicators to choose the exact months of peaks and troughs. It places particular emphasis on real personal income excluding transfers and on employment, since both measures reflect activity across the entire economy. The committee places less emphasis on the industrial production and real sales series, which mainly cover the manufacturing and goods-producing sectors of the economy. The committee also looks at estimates of monthly real GDP prepared by Macroeconomic Advisers. There is no fixed rule about what weights are assigned to the various indicators, or about what other measures contribute information to the process.
The behavior of these series strongly suggests that the trough occurred in late 2001. All the major indicators of economic activity were generally flat or declining through September 2001. Real GDP then grew at a substantial rate from the third quarter to the fourth quarter of 2001 and has continued growing since then. The committee concluded that this strong growth in the most comprehensive measure of economic activity essentially ruled out the possibility that the trough occurred later than the fourth quarter. The committee also viewed the behavior of quarterly real GDP as strong evidence against the possibility that the trough occurred in December 2001, since there could be a December trough only if economic activity was declining over most of the fourth quarter. Reinforcing the conclusion that the trough did not occur in December, two of the monthly indicators-personal income excluding transfers and the estimates of monthly real GDP-grew very rapidly in December, and the sales series grew as well. These considerations indicate that the trough occurred in September, October, or November.
Monthly real GDP and sales reached their lows in September. The committee’s conclusion that the trough did not occur in September was based on two considerations. First, personal income, employment, and industrial production were all substantially lower in October and November than in September. Second, the NBER’s practice has been to identify the highs and lows of economic activity that are due to the operation of normal economic forces; temporary movements in activity resulting from unusual forces, such as strikes, have been discounted in identifying turning points. The committee concluded that some of the depressed level of economic activity in September 2001 was the result of the exceptional events of September 11, and thus should not be considered in identifying the trough.
From October to November, industrial production and sales fell sharply, employment fell moderately, personal income rose very slightly, and monthly real GDP rose moderately. Based on this information, the committee concluded that the economy reached a trough in November.
The NBER’s practice has been that if economic activity is roughly flat at the end of a recession or expansion, the turning point is placed at the end of the flat period. Although the committee concluded that it was not necessary to invoke this rule to determine that the trough occurred in November rather than September or October, the rule strengthened the committee’s confidence in its determination.
Notice that the employment to population ratio never got back even to the end of the recession level until several years later, hence enabling GW to put out three major tax laws with some variation of the word “job” or “employment” in their titles. (Apparently there is a school of governance somewhere whose motto must be “if at first you don’t succeed, why not really screw things up?”)
This time, it may be worse. Whether we’re near or at the bottom when it comes to GDP, I don’t know. I think we are. But just like last time, I believe the job losses will go on for a long time after the GDP stabilizes and begins to rise again. Simply put, the US doesn’t manufacture enough, and too much of our employment prior to the start of the recession was tied up in irrelevancies and even harmful areas, such as financial fraud, bullshit, and, well, more financial fraud. That led directly and indirectly to several years worth of distortions in the economy, such as the overproduction of homes, vehicles and durable goods, not to mention excessive demand for raw materials. The structure of the economy needs changing, and the change is going to be paid for in pain.
Sadly, its too late to avoid the pain. Not that our leaders aren’t trying, mind you. The Fed and the Federal Government seem determined to reflate the fraudulent portions of the economy, and reviving a few of the marks for good measure. It provides a short term
fix placebo but only harms us in the long run.
But the fact that its too late to avoid the pain doesn’t mean its too late to do anything. We can (but aren’t) taking steps to avoid the next parade of grifters and crooks fleecing their way through town. And here’s how its done – hold the current batch of crooks, evildoers, and enablers accountable. Its fairly easy to do – prosecute those who broke laws, and let the market take care of the rest of them. That’s right, let them go under. Let them get sued too. Its not revenge. Its a message to those who would otherwise follow in their paths.