Little-known expert committee finds the recession is rolling on relentlessly

By Neville Bennett

Friday 19th July 2002

Wall Street analysts keep asserting the recovery is mounting. The market says differently: the Dow Jones Industrials index bled a near record 7% last week.

Whom to believe? The most objective advice comes from an almost unknown organisation set up to answer these problems - the Business Cycle Dating Committee of the National Bureau of Economic Research. The committee argues the recovery is not a sure thing.

The committee has decided the decade of growth in the US came to an end in March 2001. The expansion lasted 10 years, the longest in US history. A recession then began.

Interestingly, a recession is defined as a significant decline in activity, spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and sales.

This is broader than the popular two quarters of falling GDP. The committee accepts a recession began in March 2001 and that there has been only one quarter in which GDP declined.

A recession is a period of diminishing activity rather than diminished activity. It is a period when economic activity is below normal. In five of the last nine recessions, real income has not declined substantially but employment has. Income remains an important indicator.

The committee focuses on monthly data. GDP is measured quarterly and subject to many later revisions. It is not closely observed. Employment is measured monthly and is the essential determinant.

The volumes of sales of the manufacturing and wholesale-retail sector, plus industrial production, are also factored in. But manufacturing is becoming a "relatively small part of the economy" and less important. Output fell less than employment and is now rising faster than employment because of unusual productivity growth.

Employment decreased slightly more in the last recession than in the average movement over the last six recessions. Industrial production turned down in June 2000, and declined 7.2% over the next 18 months. The average decline in recessions is 8.8%. Industrial production is rising again.

Manufacturing and wholesale-retail sales reached a peak in August 2000 and then declined mildly until September 11 when "the [terrorist] attacks clearly deepened the contraction and may have been important in turning the episode into a recession."

Personal incomes peaked in September 2001 and have dipped slightly but appear now to be recovering. Incomes have behaved differently from recession averages, perhaps because of favourable terms of trade (which lowered the cost of imports) and continuing high productivity, which resulted in a corresponding growth in wages. A "powerful special force" of productivity growth offset the usual sustained drop in GDP.

This analysis will interest readers because of its different methodology. It will mildly surprise people that a recession may comprise only one quarter of falling GDP. The role of productivity is again affirmed as central to economic growth.

Most of the indices used for measurement are now positive but the committee insists recovery is not a sure thing. It places great reliance on employment and considers it so important that its peak alone is used to determine the start of the recession.

The US economy lost 1.8 million jobs between March 2001 and May 1, 2002. The addition of 60,000 jobs since then is insufficient to convince the committee that the economy is recovering. It refuses to commit itself, despite enormous pressure from all quarters.

This caution is important. The market wants an early statement the recession has ended. In 1991, the committee delayed its verdict on the end of the previous recession for many months. It was credited with creating a lot of uncertainty in the stock market.

Wall Street would welcome a positive verdict from the committee now, for the sharemarket has many uncertainties and has been falling for three years. The least time Wall Street declined for three years in a row was 60 years ago.

ON THE WEB

US National Bureau of Economic Research
www.nber.org/cycles/recessions.html

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