财经观察 2068 --- How Will We Know When the Recession Is Over?

How Will We Know When the Recession Is Over? by Joseph Trevisani

There are two standard definitions of recession. The first, two succeeding quarters of negative GDP is traditional, straightforward and evident as the statistics are released. By this definition the United States has been in recession since the third quarter of 2008 when the economy contracted by 0.5% followed by a negative 6.3% in the first quarter of 2009.

The second definition is compiled by the National Bureau of Economic Research (NBER), a private research organization, and uses a far more elaborate set of criteria to determine ‘business cycle’ turning points.

This approach identifies the point when economic expansion turns into contraction. The method is worth quoting in its entirety.

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

For the NBER then recessions begin at the turning point where economic expansion is replaced by contraction.

The different definitions can produce strikingly different periods of recession.

Under the NBER definition “the last expansion ended in December 2007” giving the current recession a start in January 2008. Even though the first two quarters of 2008 had positive GDP growth, (0.9% in the first quarter and 2.8% in the second), the pace of growth was slackening. The economy did not stoop to negative growth until the third quarter at -0.5% and then fell drastically in the fourth quarter and first quarter of 2009.

The most important difference between the two definitions is timing. The NBER reading begins sooner and ends sooner, because the economy will turn up, that is begin to expand, before it recovers to positive growth. By the same notion economic growth begins to recede well before it actually drops into the negative. It is likely that by the NBER definition the recession will have ended a few quarters before GDP growth crosses the line into positive territory.

However when other statistics are compared, Non Farm Payrolls (NFP), Retails Sales, Industrial Production and Consumer Confidence, the differences between the two recessionary definitions becomes minimal. That is to say both definitions are supported or not equally by the data.

NFP turned negative in January of 2008 but job losses were mild, below 100,000 per month except for June (-100,000) and August (-127,000) until the financial crisis crashed through the economy. In September job losses jumped to 403,000 and they remained over 600,000 per month until April’s -539,000 result.

These statistics fit both depictions of the current recession. The economy began shedding jobs in January but the intensification coincides within one month of the commencement of negative growth in October 2008.

Retail Sales were weak throughout the first half of 2008 and turned negative in July. They have contracted each month since except for January. These statistics largely agree with the NBER idea of a slipping economy early in the year and with the sense that the economy suddenly fell hard in the third and fourth quarters.

Real Retail Sales, that is sales corrected for the effect of price changes, paints a more ambiguous picture. They were weak in the early part of 2008, but still positive, because inflation accounted for a good portion of the sales increases in those months. They turned negative in July, as with the headline numbers, but were not nearly as negative in the latter part of the year as inflation disappeared and CPI dipped to deflation. These numbers also jibe with the NBER and traditional definitions of recession; though the real numbers do not portray the same crash in consumer spending as do the top line numbers.

Industrial production was positive in four of the first seven months of 2008 and negative in three. It turned conclusively negative in August 2008 and since then has been positive only once in October 2008. Again, these statistics are congruent with the idea of a faltering economy in the first part of 2008 and a crash in the latter months.

The Conference Board Consumer Confidence number peaked almost two years ago in July 2007 at 112.6. By January 2008 it had already fallen 22% to 87.3 and by July 2008 when GDP turned negative, it was at 51.9, 54% below the peak. Sentiments continued to fall until March of this year. The slow decline in most of 2008 and the severe drop in the last quarter and first quarter of 2009 are similar to the two recessionary definitions.

Does it matter when the United States entered recession or when it ends? By descriptive power both definitions of recession, the traditional of two negative quarters and the NBER statistical amalgam, give accurate and indeed complimentary pictures of the economy.

But for the currency markets there is one overriding difference. The NBER definition is compiled and announced long after the fact. The determination that the US recession began in January 2008 was not announced until then end of the year. The GDP statistics from the US Department of Commerce are issued within several weeks of the quarter end. For traders, only the traditional measure has relevance.