Yahoo Finance Meet the real recession referees
Scarcely a news cycle goes by these days without Wall Street types, various economists, and the occasional journalist opining about whether the US is headed for a recession or in a recession or isn’t likely to be in a recession anytime soon.
Or whether we’re headed for a soft landing. Or a hard landing or some other sort of landing as the result of the terrible conflict in the Middle East.
Are you confused by all this blather? If so, welcome to the club.
And welcome to the world of the Business Cycle Dating Committee.
The committee, created in 1978 by the National Bureau of Economic Research, is a nongovernmental, nonpartisan organization of academic economists that rules definitively on when recessions begin or end. It operates on the basis of economics, not politics.
To avoid having to reverse itself, the committee doesn’t announce for months (or sometimes more than a year) after the fact that a recession has begun or ended. For example, it took until July 19, 2021 for the committee to announce that the economy had bottomed in April of 2020. That’s the committee’s most recent announcement.
Given this time lag, why should you care about the committee?
Because the information that it produces can help economists predict the future more accurately. And because understanding history can give you important context for helping to understand the present.
The committee generally makes its calls from four to 21 months after the fact. “There is no fixed timing rule,” James Poterba, an economics professor at MIT, president of the National Bureau of Economic Research, and a business cycle committee member since 2008, told me recently. “We wait long enough so that the existence of a peak or trough is not in doubt, and until we can assign an accurate peak or trough date.”
Poterba has plenty of prominent company on the eight-person committee, which includes committee chair Robert Hall of Stanford and Christina and David Romer of the University of California at Berkley. (You can find the entire membership list here.)
Even though I’m a born skeptic, I trust the committee because unlike most of the players opining about recession, the committee is nonpartisan and noncommercial, and isn’t hungry for publicity. It also isn’t willing to offer any sort of interim opinion on our nation’s economic status.
In addition to being dispassionate and honest, the committee has the best definition of a recession that I’ve ever seen: “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
I’m telling you about this committee, why I trust it, and why I think you can trust it, too, because it’s important to all of us to know and understand what’s going on in the economy.
And it’s especially important not to buy into the widespread definition of a recession: two straight calendar quarters of a “real”— i.e., inflation-adjusted — decline in the gross domestic product (GDP). To give you an example, if the GDP rises at 2% and inflation is 3%, real GDP has declined.
Jim Poterba told me that defining a recession as two straight quarters of declining real GDP can lead people astray.
Let’s say, Poterba said, that we have two straight quarters of a tiny decline in real GDP — say 0.1% a quarter — but other indicators, such as employment and spending, remain strong. To say that two consecutive quarterly declines mean we’re in a recession would make no sense, he said.
Or let’s say there’s a 2.5% quarterly decline in real GDP caused by a factor such as bad weather in the Midwest that hurts economic output, followed by a 0.1% quarterly increase followed by a 3.5% quarterly decline, with employment and spending both falling sharply. That wouldn’t be considered a recession by the two consecutive quarters of declining real GDP definition — but would clearly be a recession.
One of the things that I also like about the committee is that when it makes a call of the economy entering or exiting a recession, it tells everyone about it at the same time via email.
This way someone like me — I just signed up for the list — would see the committee’s ruling the same time Wall Street’s trading desks will. (You can sign up for committee reports by using this link.)
Sure, signing up for announcements that come months after a recession has begun or ended doesn’t offer you any advantages in buying or selling securities. And it’s not as much fun as watching and reading people bickering about economic numbers.
But it’s a much better use of your time and mental energy.
Allan Sloan, who has written about business for more than 50 years, is a seven-time winner of the Gerald Loeb Award, business journalism’s highest honor. He’s won Loebs in four different categories over four different decades.
