Watch for the news headlines if the Gross Domestic Product, as expected, shows growth for the third quarter when it is reported by the Bureau of Economic Analysis Thursday morning. Those headlines are very likely to declare the recession is over.
Save the newspapers - they could be as valuable as those from the Chicago Tribune that trumpeted “Dewey Defeats Truman” in 1948.
While the anecdotal definition and the conventional rule-of-thumb hold a recession is marked by two consecutive quarters of negative growth, a positive quarter merely means negative growth has stopped, not necessarily that a recession is over or that a recovery has begun.
The two-quarters-of-negative-growth “definition” is a backward formation: it was based on an observation by economic statistician Julius Shiskin that recessions were usually accompanied by two consecutive quarters of negative economic growth, but it is not a requirement. The 2001 recession, for example, extended from March 2001 (1Q) through November 2001 (4Q). GDP was negative in the first and third quarters but positive in the second and fourth (as well as 4Q 2000). The National Bureau of Economic Research’s Business Cycle Dating Committee, which officially sets the start and end date of recessions, has waited an average of 15 months to declare the end of a recession. It didn’t set the end date of the 2001 recession until July 2003.
NBER has been deliberate and precise in declaring not only the end of a recession, but the onset as well. Here’s how NBER handled the last few recessions:
-- The 1980 recession began in January, but NBER didn’t declare it until June; NBER didn’t set the date for the end of the recession (June) until July 1981 – 13 months later.
-- The 1981-82 recession began in July 1981 (yes, the same month in which NBER declared the end of the 1980 recession), but NBER didn’t declare it until January 1982; NBER didn’t set the date for the end of the recession (November 1982) until July 1983 – eight months later.
-- The 1990-91 recession began in July 1990, but NBER didn’t say so until April 1991; the recession ended in March 1991, a date set by NBER in December 1992 – 21 months later.
-- The 2001 recession began in March, so the NBER announced in November; the recession in fact ended in November but NBER’s announcement came in July 2003 – 20 months later.
NBER looks at more than just GDP in determining the start and end dates of business cycles, peaks (the beginning of a recession) and troughs (the end). Indeed, because GDP is tabulated quarterly by BEA, it is imprecise in establishing a start and end date.
Instead what NBER looks to are indicators than come from different government agencies and are reported monthly. NBER will also take into account subsequent revisions to the numbers as the agencies get updated and more accurate information. In fact, Thursday’s GDP report is official an advance “estimate” of the nation’s economic report card.
BEA had issued two other reports for each quarter’s GDP: a “preliminary” estimate and “final” estimate, and though the latter two reports have been re-titled as “second” and “third” estimates, they are still estimates. As part of the report Thursday, BEA will take a five year look-back at GDP reports and could re-state the numbers.
The measures NBER uses cut across a wide swath of the economy: employment, personal income (excluding government transfer payments such as Social Security or unemployment insurance), industrial production and manufacturing and trade sales.
Those numbers have been far from uniform or unanimous in signaling a “trough.”
Payroll jobs, for example, seemed to have hit bottom in that there were fewer jobs losses from February through May than in each of the previous months, but then job losses in June were more than in May; job losses declined again in July and August, but then increased in September: no clear bottom. Month-month declines in household employment seemed to have stopped in April when household employment actually increased, but then fell again and in September employment fell by more than any month since March.
Personal income (excluding transfer payments), too, has been erratic and began to grow only in July after 10 straight months of decline but the July and August increases were the weakest in over a year.
Industrial production may be showing a solid turnaround. It had fallen for nine straight months before turning positive last October and then resumed its decline for another eight months. It has been growing since July. Manufacturing and trade sales have been erratic however in a see-saw pattern for the last nine months – the most recent report showed a drop in sales.
The specific number in Thursday’s report notwithstanding, the general view is the nation’s Gross Domestic Product will show growth in the third quarter for the first time in a year with an accompanying chorus of declarations of the end of the recession.
We’ll have to look at specific components to understand how temporary or lasting the GDP improvement is. When GDP fell in the second quarter by “only” 0.7%, an analysis of the data showed the government component of GDP jumped at a 6.7% annualized rate and its share of GDP went to 19.9%, the largest share since the second quarter of 2003.
The largest component of GDP – consumption – fell at a 0.9% annualized rate in the second quarter, underscoring the importance of government in this report card on growth.
Much of the improvement in GDP will also reflect stronger economic growth overseas boosting demand for exports as well as a slower rate of inventory liquidations. Because of GDP accounting, even as inventories continue to decline, if they decline more slowly it will show up as a boost to GDP.
Another curious piece of accounting will be the impact of cash for clunkers, which will appear not entirely as an increase in consumer spending but in part an increase in government spending.
The temporary nature of the positive contributions means a sustainable economic recovery will need a solid, consistent boost in aggregate demand – consumption – which dropped in the second quarter to the lowest level since the end of 2006.
In short, it ain’t over until it’s over.
Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.
Follow Mark on Twitter at foxeconomics: http://twitter.com/foxeconomics
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