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7/13/2003

Number crunchers take on recession

By John M. Berry
The Washington Post

WASHINGTON — The arbiter of when U.S. economic recessions begin and end, the Business Cycle Dating Committee of the National Bureau of Economic Research, has laid the groundwork for calling an official end to the slump that began in March 2001.

It could be weeks or months before that happens, but the committee has found a way around the fact that its key monthly indicator, payroll employment, has continued to decline long after the economy resumed growing.

The committee designated March 2001 as the beginning of the recession primarily because that was when the number of payroll jobs began to drop, a decline of 2.6 million so far.

If the committee were to rely on the same indicator to date the end of the slump, the recession would already have lasted for two years and three months, making it the longest since the vastly more serious downturn that began in 1929 and became the Great Depression.

Until the 2001 recession, the employment number and other indicators used by the committee have done a generally good job of tracking the rise and fall of the nation’s economic output. This time, however, changes in payroll employment have not been a good proxy for economic growth, because productivity — the amount of goods and services produced for each hour worked — has continued to increase through the economy’s contraction in 2001 and sluggish expansion since. That has allowed companies to increase production while cutting their workforces.

The most commonly used indicator of the nation’s economic output is the Commerce Department's quarterly estimates of the inflation-adjusted gross domestic product, or GDP, a broad measure of all the goods and services produced in the United States. Those estimates show that the GDP declined in each of the first three quarters of 2001 — a clear recession, according to the committee’s criteria. But the GDP began growing again in late 2001 and has continued to do so since.

“While NBER has yet to declare the recession over, the reality is that real GDP bottomed two years ago,” economist David Rosenberg of Merrill Lynch & Co. told his firm’s clients this week.

“Employment ... has never been down so much this far into a post-recessionary phase,” he said, noting that payroll employment is still 2 percent below its peak, compared with being roughly 5 percent higher at the same point in prior economic recoveries.

The current situation “makes the early-1990s ‘jobless recovery’ look like a hiring spree,” he added.

Until now, however, the committee has never used the quarterly GDP number as one of the economic indicators it tracks, preferring instead to use four other monthly numbers.

But the committee indicated recently that it has found a way to stick with its monthly indicators while adding a new one, monthly estimates of GDP calculated by Macroeconomic Advisers, a St. Louis forecasting and consulting firm.

Chances are, by giving far more weight to the GDP than it has in the past, the committee will decide before long to call an end to the 2001 recession, which many economists believe ended late that year.

This is the dating committee’s official definition of a recession:

“A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough,” the committee says.

In a statement issued in April, the committee said: “The traditional role of the committee is to maintain a monthly chronology, so the committee refers almost exclusively to monthly indicators. The committee gives relatively little weight to real GDP because it is only measured quarterly.”

But that language was sharply revised when the next update was posted last month on the National Bureau of Economic Research’s Web site:

“The committee views real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, the committee therefore places considerable weight on the estimate of real GDP issued by the Bureau of Economic Analysis of the U.S. Department of Commerce.”

For the first time, the June statement included a chart showing changes in real GDP, and it added: “The committee also looks at monthly estimates of real GDP prepared by Macroeconomic Advisers.”

The committee also acknowledged in its statement last month that when economic growth resumed in the fourth quarter of 2001, inflation-adjusted GDP jumped past its pre-recession peak and that it has continued to rise since then.