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How does the National Bureau of Economic Research (NBER), the official
arbiter of U.S. business cycles, determine the beginning and end of a
recession? A peak in the business cycle marks the end of an expansion and
the beginning of a recession. The traditional role of the committee is to
maintain a monthly chronology so they refer almost exclusively to monthly
indicators. As a result of this monthly focus, the committee gives relatively
little weight to real GDP, which is only measured quarterly and subject to
continuing, large revisions. The broadest monthly macroeconomic
indicator is employment. The committee also generally studies another
monthly indicator of economy-wide activity, real personal income less
transfer payments (top graph) adjusted for price changes. In addition, the
committee refers to two indicators with coverage of manufacturing and the
broader sales and distribution of goods: (1) industrial production (middle
graph) and (2) the volume of sales of the manufacturing and trade sectors
(bottom graph).
Following the NBER methodology, we created ‘spider charts’ for all four
indicators as if September 2007 was the business cycle peak. Real personal
income less transfer payments, peaked in September 2007 and then fell
slightly over the next two months. Industrial production also confirms
September 2007 as the peak. The real manufacturing, trade and sales data
are still trending upward as of November, but the advance report on retail
sales for December indicated a decline in at least one component of
business sales.
On the positive side, our fourth indicator, employment continues to
increase. This is the one factor that appears to be keeping the economy
from falling into a clear recession since employment is holding up
household income and, therefore consumption.
The September Break: Data Suggest Downturn Could Have Begun Then
Up until September our key indicators did not suggest a recession, but
since then these same indicators show a clear shift in the economic winds
and therefore a bias toward caution for decision-makers. We can never be
absolutely sure about recessions but we can learn with the data. They
suggest that a recession is an even bet unless public policy, as it did in
1987, reacts swiftly and effectively to avert the downturn. To corroborate
this cautious outlook on the economy our empirical model of recession
suggests a 59 percent chance of recession as of the November data.
Real Manufacturing and Trade Sales
Index, September 2007 = 1
0.96
0.97
0.98
0.99
1.00
1.01
Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08
0.96