This post is a guest contribution by Asha Bangalore*, vice president and economist at The Northern Trust Company.
The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) announced today that the US economy peaked in December 2007. The peak of economic activity identifies the beginning of a recession and the end of the expansion that began in November 2001.
The committee’s definition of a recession: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.”
The evidence the committee uses to meet this definition is based on quarterly and monthly data. The quarterly estimates of real Gross Domestic Product (GDP) and the quarterly estimate of real Gross Domestic Income (GDI) should, in theory, yield the same results but measurement issues lead to slightly different estimates. The real DGP estimates indicate that real GDP fell slightly in 2007:Q4, rose in 2008:1 and 2008:Q2, and declined in 2008:Q3. The real GDI estimate peaked in the third quarter of 2007, fell slightly in the next two quarters, rose slightly in 2008:Q2 but held below the peak of 2007:Q3, and edged down again in 2008:Q3. The variations in these estimates do not help to pin down the exact date.
The monthly estimates the Business Cycle Dating Committee of the NBER uses are: (1) real personal income less transfer payments, (2) real manufacturing and wholesale-retail trade sales, (3) industrial production, and (4) employment estimates based on the household survey. These economic variables reached peaks between November 2007 and June 2008. The committee identified December 2007 as the month when a recession began based on the behavior of these economic variables, which matches their definition of a recession. (Details are available at Business Cycle Dating Committee, National Bureau of Economic Research.)
In the post-war period, the median duration of a recession has been ten months. The current recession has now surpassed the average and median durations of recession experienced in the post-war years.
There is a delay between the actual onset of a recession and when the Business Cycle Dating Committee of the NBER, a record keeper of economic history, announces it because of data revisions. Tracking the depth of the recession from incoming economic data suggests the US economy is heading to experience a recession close to that of the 1980s.
* 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.
Source: Northern Trust – Daily Global Commentary, December 1, 2008.
