“The data are pretty clear that we are not in a recession,” Council of Economic Advisers Chairman Edward Lazear told a meeting of editors and reporters from the Wall Street Journal and Dow Jones Newswires.
“I would be very surprised if the NBER, looking back at this period, would date this as a recession,” Mr. Lazear said. There are even indications that revised first-quarter estimates would be slightly stronger than 0.6%. “The optimists seem to have been closer to right on that than the pessimists,” he said.
Just to reiterate, that quote is from May 2008.
Figure 1: Gross domestic product (blue), and gross domestic income (red), in Ch.2000$, SAAR. Real GDI calculated as nominal GDI deflated by GDP deflator. NBER defined recession shaded gray, and dashed line at NBER peak. Source: BEA GDP release of 25 November 2008, and NBER.
I thought at the time Ed Lazear would regret those remarks. But Lazear’s views were not unique. Here are some additional quotes of interest, hoisted from the comments sections in Econbrowser:
From March 2008, in response to my worries about 2008H2 growth:
While the financial market turmoil and dysfunctional credit markets are significant wild cards, interest rates are so low (and could be 2.25% this week!) that you have to think that growth later this year and into ’09 should be positive, if not strong.
The Macroeconomic Advisers monthly real GDP index rose to a record high in December. It fell in October but rebounded in November and December.
Preliminary indicators suggest it rose again in January.
I get a sense that some academic economists are actually rooting for a recession, a way of punishing the country for having elected Bush.
In other words, looking at data too close to the candidate turning point can easily lead to subsequently embarrassing remarks. Nonetheless, the specific dating of the recession to December 2007 has spurred lots of queries about whether it matters, when (i) the recession is so much in evidence, and (ii) whether any greater importance should be accorded to a declaration by the NBER as opposed to any other group or individuals. Here are some thoughts on both questions, augmented with some retrospective views.
First, to the question of whether it matters that there’s a declaration. Here, I turn to Jeffrey Frankel, who is on the NBER BCDC, but is speaking on his own behalf:
We sometimes hear the question “Who needs the NBER Committee anyway?” This question most often comes in one of two forms:
(a) Everyone in the real world has known that the economy has been in a recession for some time. In past cycles, media reports have sometimes taken the line “Ivy Tower Eggheads Finally Figure Out What Everybody Else Has Known All Along.” The implicit critique is that the committee takes too long after the event — typically almost a year — to make its declaration. One short answer is that our job is to be definitive, authoritative, but not fast. We don’t want to have to revise our dating of the peaks and troughs later, in part because it would sow confusion among those who rely on them (from econometric researchers to political speechwriters). GDP and other official statistics are often revised after the fact, for example. We leave it to others — pundits, forecasters, consulting companies, financial newsletters, and so on — to try to get there first. We deliberately get there last.
(b) The other form taken by the question “Who needs the NBER committee?” runs as follows: “The rule of thumb is simple: two consecutive negative quarters of GDP growth. Why complicate things?” The Frequently Asked Questions segment of the BCDC announcement answers this in detail. For now, observe simply that questions (a) and (b) are inconsistent with each other. As of December 1, 2008, the US economy has not yet experienced two consecutive negative quarters. So an argument that we should wait for two consecutive quarters (critique b) is the opposite of the critique that we should have acknowledged a recession before now (critique a).
Taking Frankel’s points into account, we can then move to the second question, whether it matters that NBER BCDC makes the determination. Think back to the two-quarter rule of thumb. Why is it a “rule of thumb”? Because the data are revised over time — most importantly GDP — the two quarter (sometimes defined as a “technical recession”) is heavily reliant upon the series that is most subject to revision. I’ve discussed the importance of revisions numerous times in this context: , , , , .
Another motivation is to recall that the NBER is a research group, and not a policy group, trying to identify for historical purposes the ebb and flow of activity. In any case, we want to place the responsibility for identifying peaks and troughs in economic activity in the hands of a disinterested group, and not in — say — the government. (I’ll add that it’s an auspicious group: “Robert Hall, Stanford University (chair); Martin Feldstein, Harvard University and NBER President Emeritus; Jeffrey Frankel, Harvard University; Robert Gordon, Northwestern University; James Poterba, MIT and NBER President; David Romer, University of California, Berkeley; and Victor Zarnowitz, the Conference Board. Christina Romer of the University of California, Berkeley, resigned from the committee on November 25, 2008, and did not participate in its deliberations of November 28.”)
(For those wondering why NBER gets to declare the recession dates, one hint is that it was NBER researchers Burns and Mitchell (1946) who developed the lens through which “cycles” experienced in industrial economies were perceived. For the inquisitive, here is a link to the volume which summarized that research: Burns, Arthur F. and Wesley C. Mitchell, Measuring Business Cycles (NBER, 1946).)
This is why I think so much of the commentary, saying that this was all obvious, not only demonstrates a distressing level of ignorance, but also a juvenile approach to discourse (see e.g., here). Yes, it was pretty obvious that we were in a recession, but when it began is something that could have been placed at any number of dates. We will have a similar debate when we starting thinking about dating the trough.
I think it’s also of interest to look back at whether we should be so surprised. I’ll focus on the debate that occupied our attention months ago: whether the yield spread had predictive power for future economic activity. Well, now we can conclude the answer was yes. The inversion in August 2006 predates the recession’s beginning by about 16 months.
Now, what we don’t know is how well the prediction holds cross-country. This graph from a March 2007 post suggests it will work for Europe (we’ll have to see what CEPR says, although current forecasts seem pretty definitive).
Figure 2: Ten year – three month term premium, daily averages. For US (blue), ten year rate is constant maturity, three month rate is for T-bills in secondary market; for Euro area (red), the ten year rate is the GDP-weighted rate of on-the-run benchmark bond yield, three month rate is for interbank money rate; for Germany (green), the short rate is the daily interbank rate. NBER recession dates shaded gray, CEPR recession dates (converted from quarterly dates) shaded light blue. Squares are data for March 9 (where Euro ten year rate proxied by arithmetic average of benchmark bid yields for Germany, France, Italy, Netherlands and Spain). Sources: St. Louis Fed FREDII; IMF, International Financial Statistics; Financial Times; NBER; CEPR; and author’s calculations.
Here’s a cross-country snapshot from an October 2007 post.
Figure 3: Ten year benchmark bond yield minus three month yield spreads, from Economist, Oct. 12, 2007 and Oct. 11, 2006 issues, and author’s calculations.
Australia and the UK seemed to be conforming to the prediction from the yield curve. Canada to date has failed to experience negative growth, and so might be thought to also conform to the prediction of yield curve — at least so far.