 |
|
|
 |
|
|
 |
 |
|
 |
|
|
 |
|
|
 |
|
|
 |
|
|
 |
|
|
 |
|
|
 |
|
|
 |
|
|
October 21, 2001
Recession is declared when many indicators agree
By James W. Coons
Something special happened to the economy earlier this year. For the first time in more than a decade, economic activity switched from expansion to recession. The official announcement will not come for many months, but the evidence is unmistakable.
A recession is commonly defined as two consecutive quarterly declines in the economy. The broadest measure of economic activity is Gross Domestic Product, or the market value of all goods and services produced during a given period. GDP was essentially flat in the second quarter, and is certain to have declined in the third. Most forecasters expect a second decline in the current quarter.
Economist Arthur Okun is credited with the rule-of-thumb that two quarters of economic decline spell recession. He noticed in the 1960s that back-to-back quarterly declines in GDP had occurred during every recession and only during recession up until then.
In fact, GDP does not define recessions. The Business Cycle Dating Committee of the National Bureau of Economic Research determines the official starting and ending dates of recessions by reviewing scores of weekly and monthly indicators. The NBER is a private, non-profit research organization founded in 1920 to promote understanding of how the economy works.
Chaired by Stanford University economist Robert Hall, the Committee is composed of six economic scholars, who meet whenever the business cycle appears to have turned. According to the NBER website, “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and trade.”
The U.S. economy has undergone nine recessions in the last fifty years - most recently from July 1990 to March 1991. Since World War II, recessions have ranged in length from six months to sixteen months and have averaged twelve months in length. During the last fifty years, the economy has been in recession just fewer than two months per year on average.
When enough time has passed to permit a complete and thorough review, the Committee will use the three Ps of business cycle analysis to examine the data. To qualify as a recession, a downturn in the economy must be pronounced, pervasive, and prolonged. The decline must be significant in depth and duration, and it must be evident in most regions and segments of the economy.
After deciding that a recession is underway, the Committee distills a single turning point date for the overall economy from the timing of peaks in an array of individual indicators. A consensus might be more elusive than usual this time. Industrial production peaked last September, as did total business sales. But employment continued climbing until March and income was still rising in July.
Contrary to a widely held view, the recession almost certainly started before the attacks of September 11. The half percentage point jump in the unemployment rate in August boosted the total increase since last November to a full point. Unemployment has never increased by that much except during recession. The nearly year-long decline in industrial production worsened markedly in August, and consumer confidence fell sharply in late August and early September.
Anirvan Banerji, a business cycle guru who predicted recession in March, says “It’s a bit too early to decide the precise month,” but “if you really pushed me to name a date, I’d suggest March 2001.” It will probably be well into next year before the Committee deliberates. And when it does, the process will surely be as much art as science.