November 2003
By ROBERT PEGG
Several months ago, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) met and decided that the U.S. economic recession that began in March 2001 ended in November 2001, eight months later. The news wasn't exactly earthshaking, as most economists had concluded more than a year ago that the recession had indeed ended in late 2001. However, in determining that the economic decline ended in November 2001, the committee concluded that economic conditions since that month have been favorable, such that the economy had returned to operating at a relatively normal capacity.
The mysterious NBER is a private, not-for-profit economic research group that is the official arbiter of recession timing. The decision to call for an end to the recession came despite a relatively weak economy. How the committee arrives at its decisions always has been food for speculation, since its deliberations are not open to the public.
Basically, when the committee decides to call for a recession or recovery, it focuses on several major economic variables. The first is the gross domestic product (GDP), which is the volume of the nation's output of goods and services measured quarterly. Since the fourth quarter of 2001, the GDP has increased slowly but consistently. On the other hand, and making the call difficult, many employers have continued to eliminate jobs, with many potential employees dropping out of the labor force because they have been discouraged by their limited job prospects. The committee considers that many of the macroeconomic indicators, such as GDP and employment trends, are subject to substantial revisions and measurement error. As a result, the committee also looks at a variety of monthly indicators to choose the exact months of the peaks and troughs. For example, the committee places emphasis on real personal income, since the measure reflects economic activity across the entire economy. On the other hand, the committee places less emphasis on industrial production and sales, which mainly cover the manufacturing and goods producing sectors of the economy.
The committee's goal is to determine the dates of the peaks and troughs as definitively as possible. They are careful to avoid premature judgments. Initial announcements of many of the major economic indicators are preliminary and subject to substantial revisions, so it is not possible or wise to identify the month of a peak or trough too quickly. The main reason that the committee's decision in this particular cycle took so long, and was exceptionally difficult, was the lagging behavior of the employment indicators.
In typical recoveries since the end of World War II, economic output has recovered sharply as businesses pushed to rebuild inventories and invest in new equipment. With demand for their products increasing, managers normally would soon begin hiring additional workers. This time, however, economic growth has been erratic, resulting from intense foreign competition, lack of capital spending and worries about the stock market. Moreover, productivity growth has been strong, meaning that businesses can meet weak demand for products and still lower their payrolls. The result has been a recovery that, at best, is below historical norms.
A comparison of NBER business cycle reference dates and turning points in the GDP and payroll employment for the post-World War II era, suggest that the NBER has placed more emphasis on output-based measurements, such as GDP. Research finds that while there are some recessions where the turning points in employment are closer to the NBER reference dates than are the turning points in real GDP, the turning points in real GDP are never really far from the NBER turning points.
The decision to mark the beginning of the recovery at November 2001, just two months after Sept. 11, emphasizes the resilience of the U.S. economy in the wake of the attack. Subsequent to the 9/11 attacks, many economists believed that the blow would seriously harm an already weak domestic economy. Forecasters lowered their estimates of future economic growth and policymakers began to find ways to stimulate the economy. However, as we all now know, the Federal Reserve Board slashed interest rates 13 times, stimulating the nation's housing industry and the federal government cut taxes. This monetary and fiscal combination still has meant only slow economic growth; but without the cuts, the nation's economy might have suffered a more severe recession.
About the author: Mr. Pegg is president of Kirkbride Asset Management, the New York City-based investment advisory firm which serves businesses, institutions and private individuals.