Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. We track each of the four at the following individual links:
- Nonfarm Employment
- Industrial Production
- Real Retail Sales
- Real Personal Income (excluding Transfer Receipts)
The Big Four Recession Indicators
The chart and table below illustrate the performance of the generic big four since the end of the most recent recession (2020). The NBER declared the recent "COVID" recession to be just two months, ending in April 2020. This is the shortest recession on record - here is its announcement on the topic. The data points show the cumulative percent change from a zero starting point for April 2020.
Retail sales bounced back most rapidly, due to pent-up demand and savings by consumers at the start of the pandemic. However, consumer spending has leveled off over the past few years as high interest rates, dwindled savings, and elevated inflation have had a major impact on consumers' spending habits. Industrial production initially showed the second fastest recovery out of the four but then producers and suppliers struggled with limited inventory and supply-chain issues. Like retail sales, industrial production has leveled off over the past few years. Employment has slowly but steadily improved since the official "end of the recession". With that said, employers cannot fill many open positions for a variety of reasons. Real income has shown the weakest recovery but continues to gradually improve. Income has been an ongoing issue in terms of trends and matching inflation over the years.
Below is the same percent change chart as above, but shows the performance of the generic big four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009.
The Big Four Recession Indicators: Background Analysis
The charts above don't really show us the individual behavior of the big four leading up to each of these recessions. To achieve that goal, I've plotted the same data using a "percent-off-high" technique. In other words, I mark new highs as zero and show the percentage drops for months that don't hit new highs. This method makes it easier to see and compare the declines for each indicator over time. Here is our four-pack showing the indicators with this technique.
- Nonfarm employment is currently 0.00% off its all-time high (data through July 2024)
- Industrial production is currently 0.11% off its all-time high (data through June 2024)
- Real retail sales are currently 3.62% off its all-time high (data through June 2024)
- Real personal income is currently 0.00% off its all-time high (data through June 2024)
It's difficult to discuss the behavior of the big four leading up to the "COVID" recession - it likely would have occurred regardless of the strength of each of the four. Industrial production had not yet fully recovered from the great recession and was well off its high when COVID "hit". Employment and real income were not terribly far off their highs, and retail sales wavered but had recovered.
Now let's examine the behavior of these indicators across time. The first chart below graphs the period from 2000 to the present, thereby showing us the behavior of the four indicators before and after the three most recent recessions and now. Rather than having four separate charts, we've created an overlay to help us evaluate the relative behavior of the indicators at the cycle peaks and troughs. (See the note below on recession boundaries).
The chart above is an excellent starting point for evaluating the relevance of the four indicators in the context of three very different recessions. In all instances, the bounce in industrial production and retail sales matches the NBER trough, while employment and personal incomes lagged in their respective reversals.
As for the start of these three 21st century recessions, the indicator declines are less uniform in their behavior. We can see, however, that employment and personal income were laggards in the declines.
Now let's look at the 1972-1985 period, which included three recessions -- the savage 16-month oil embargo recession of 1973-1975 and the double dip of 1980 and 1981-1982 (6-months and 16-months, respectively).
And finally, for sharp-eyed readers who don't mind squinting at a lot of data, here's a cluttered chart from 1959 to the present. That is the earliest date for which data for all four indicators is available. The main lesson of this chart is the diverse patterns and volatility across time for these indicators. For example, retail sales and industrial production are far more volatile than employment and income.
The Big Four Recession Indicators: Aggregate
The charts above focus on the big four individually, either separately or overlaid. Now let's take a quick look at an aggregate of the four. The next chart is an index created by equally weighing the four and indexing them to 100 for the January 1959 start date. I've used a log scale to give an accurate indication of growth and also added an exponential regression to assist us in seeing the secular patterns of faster and slower growth.
Now let's plot the percent off high for this aggregate index. As we immediately recognize, it is completely worthless as a leading indicator of recessions. The aggregate index set a new high the month before the recession began for six of the nine recessions since the early 1960s.
We can construct a better leading indicator by plotting the average of the percent off highs for each of the four, which is the technique we've used in the next few charts. Here we've highlighted the months when all four indicators were at all-time highs. The dashed line shows the -0.91% average of the four at recession starts. The average set an all-time high in November of 2014 and was just 0.03% away in November of 2018. The latest average is 0.93% off a new high.
For a closer look, we've narrowed the time-frame on this next chart.
A note on recessions: Recessions are represented as the peak month through the month preceding the trough to highlight the recessions in the charts above. For example, the NBER dates the last cycle peak as December 2007, the trough as June 2009 and a duration of 18 months. The "peak through the period preceding the trough" series is the one FRED uses in its monthly charts, as explained in the FRED FAQs illustrated in this Industrial Production chart.
