There’s No US Recession Until an Obscure Panel of ‘Eggheads’ Says It Is So
Wall Street and Washington are loudly debating whether the US economy can escape a recession -- but that monumental judgment will be made by eight eminent economists meeting quietly and far from public view.
While many countries define an economic downturn as two consecutive quarters of negative growth for gross domestic product, the US defers this assessment to elite academics at the National Bureau of Economic Research, based in Cambridge, Massachusetts, whose leaders scoff at the two-quarter benchmark as simplistic and misleading.
Recessions have huge impact on markets and US politics. So the NBER Business Cycle Dating Committee of six men and two women -- led by Robert Hall, a 78-year-old Stanford University professor -- can expect harsh criticism if it declines to swiftly declare one on President Joe Biden’s watch following two straight quarters of shrinking GDP.
But the nonpartisan panel, which was established in 1978 by former Ronald Reagan adviser and NBER president Martin Feldstein, has gone out of its way to keep politics out of the process.
The committee meets in secret and doesn’t announce its gatherings in advance or even in retrospect, unless there’s a press release declaring a formal decision.
And it typically takes the panel about a year to decide on a recession call, though some decision have been made in a few months while others have taken almost twice as long. That’s almost always well after a recession has been widely recognized by Wall Street.
The committee has never reversed a call.
Its other seven members include Christina Romer, head of President Barack Obama’s Council of Economic Advisers, and Robert Gordon, author of an influential book predicting dire US growth in the next century.
Past members have included former Federal Reserve Chair Ben Bernanke; Greg Mankiw, chief White House economist for President George W. Bush; and Feldstein, who died in 2019.
It’s a mixture of economists who have had leading political roles over at least four presidential administrations and “Ivory Tower eggheads,” said Harvard University professor Jeffrey Frankel, a former committee member.
The group is focused strictly on the economic data, and “the subject of politics never came up, not once,” said Frankel, who served on the committee from 1993 to 2019 except several years when he served on President Bill Clinton’s CEA. “It’s a credit to Martin Feldstein and Jim Poterba that there have never been political attacks on the committee.” Poterba, a Massachusetts Institute of Technology professor, leads the NBER today.
The NBER doesn’t try to time announcements to avoid any impact on elections, saying that would be aiding one side or another. The group declared a 2020 recession only a few months after a sharp decline in output and loss of 22 million jobs.
Rather than two negative GDP readings, the NBER is looking for a substantial decline in activity over a sustained period of time. The committee sets dates of the peaks of economic activity and troughs based on six monthly data series, including nonfarm payrolls, personal consumption spending and industrial production.
During a long expansion like the 1990s, the committee can go years without a meeting, and members only exchange calls or emails as they update Frequently Asked Questions on the website, Frankel said.
US GDP contracted in the first quarter and trackers of economic activity, such as the popular Atlanta Fed indicator GDPNow suggest it will do so again in the second quarter when data are release on July 28. However, apart from a possible negative GDP print, many indicators suggest the economy is still expanding.
What Bloomberg Economics Says...
“The committee’s current methodology is sound. Q1’s contraction is mainly due to strong imports (due to strong demand) after slowdown inventory building due to combination of supply bottlenecks and gangbuster inventory building in Q4 last year. It’s hard to interpret that as a weakness-driven contraction.”
-- Anna Wong, chief US economist
As a rule, Hall, who’s led the committee since its inception, says he won’t comment on economic data. He’s unaware if the committee has ever not declared a recession when there have been two negative GDP prints.
The committee, in addition to using the six monthly indicators, does consider GDP averaged with less commonly followed gross domestic income, which was positive in the first quarter.
The NBER was founded in 1920. It published its first business cycle dates in 1929.
Former NBER President Arthur Burns co-wrote a book in 1946 called “Measuring Business Cycles” that was “the bible on the subject,” said Michael Bordo, an economics historian at Rutgers University. “Its dates became accepted as the best authority. One of the reasons they were so respected is that they were totally independent of government.”
Burns went on to be one of the least successful Fed chairs, from 1970 to 1978, when inflation accelerated as the central bank misjudged the tightness of the labor market.
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