Recession Referees Reject Idea That Two GDP Drops Spell a Downturn
The official arbiters of US recessions aren’t close to making a call that a downturn is under way, and may end up concluding 2022’s first half was part of a continuing expansion.
The National Bureau of Economic Research’s business cycle dating committee rejects the notion that two quarterly contractions in gross domestic product is conclusive of a recession. Instead, the group of eight elite academic economists looks at half a dozen monthly economic reports to see a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
The committee doesn’t believe in “the two-quarter-declining GDP rule,” NBER President and Chief Executive Officer James Poterba said via email. That was after data Thursday showed gross domestic product fell at a 0.9% annualized rate in the second quarter after a 1.6% drop in the first three months of the year. He declined to comment on the current economy.
Some economists informally use a rule of thumb that two negative GDP quarters indicates a recession. The academics who sit in judgment on the US business cycle are not among them.
“I don’t think that the two-quarter idea has any merit,” Stanford University economist Robert Hall, chair of the committee, said in an interview prior to the report. He said he was unsure if the committee has ever declined to declare a recession after two negative GDP quarters. He declines to comment as a matter of policy on the current economy.
What Bloomberg Economics Says...
“It’s extremely unlikely NBER could or would make a recession call anytime soon. As usual, they’ll be late, but that’s by design... Few of the relevant indicators have been consistently negative -- but, many are choppy. Barring revisions, it still seems unlikely NBER would date the peak as early as June.”
-- Andrew Husby, Bloomberg US economist
The nonpartisan panel, which was established in 1978 by former Ronald Reagan adviser and NBER president Martin Feldstein, typically takes about a year to decide on a recession call and sometimes almost twice as long. The research organization doesn’t announce its discussions in advance, though former committee members say it’s not close to making any call.
The NBER does include GDP as a factor in its deliberations, but averages it with the less-followed metric of gross domestic income. The average of those two was positive in the first quarter and income hasn’t been reported yet for the second quarter.
In dating peaks and troughs in the economy, the committee also looks at six monthly indicators, including nonfarm payrolls and consumer spending – engines of the economy that have remained solidly upbeat this year.
“I don’t think we are in a recession,” said Benjamin Friedman, a Harvard University economist who served on the committee from 1978 to 1991. “A recession is a sustained and broad-based decline in economic activity, across many sectors of the economy. To point to the most obvious contradiction, the economy is still adding jobs at a very good rate. Many industries continue to see robust sales.”
The committee, on its website, cites several reasons in rejecting the two-quarter GDP-decline metric for recessions, noting relatively small declines in GDP would qualify even if not substantial. The organization also notes gross domestic income as an important measure that can conflict with GDP, as it did in the first quarter. And it points out its main focus is on monthly data, not quarterly reports.
Fed Chair Jerome Powell said at his Wednesday press conference the US isn’t in a recession, citing the recent strength of monthly payrolls as inconsistent with a downturn.
“I personally do share Chair Powell’s assessment,” said Harvard University professor Jeffrey Frankel, a former NBER panel member who served two stints on the committee from 1993 to 2019.
It’s “very unlikely” a recession started in the first quarter and the data is more mixed on the second quarter, he said. “The NBER committee will wait until more data comes in, before serious discussion about the possibility of a recession. The committee declares a turning point with a lag of 11 months on average.”
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” and the committee’s expertise has been widely recognized over decades by both the US government, which regularly cites its calls on its websites, and by Wall Street.
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