NBER Agrees with Normal People on End of Recession, Remains Wrong About Its Beginning (with Additional Proof)
So NBER got it half right. It remains wrong about when the recession began, and unless there are either significant downward adjustments to the relevant data down the road, or a retraction on their part, their assessment will remain so for all time by at least four and more likely six or seven months.
To remind readers, here, largely in their own words using their own standard, is why the NBER got their declared beginning wrong.
Here is their standard:
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.
First, let’s look at “production,” the primary overall measurement of which in terms of goods AND services is Gross Domestic Product (GDP). During the seven additional months in which the NBER says we were in recession (December 2007 through June 2008), reported GDP growth was as follows:
- 4Q07, +2.7%
- 1Q08, -0.7%
- 2Q08, +0.6%
If there’s a “significant” decline in there, I don’t see it. Even during the first half of 2008 in isolation, there’s still a tiny increase.
Now, let’s look at employment:
Again, one has to consider the word “significant” in NBER’s definition.
In December 2007, the first month of its alleged recession, seasonally adjusted employment as shown in the first chart increased. During the first quarter of 2008, the seasonally adjusted decrease was clearly small, amounting to a “whopping” 0.069% of the workforce. The seasonally adjusted numbers began getting significantly large in April.
The not seasonally adjusted (NSA) numbers in the second chart also tell an important tale. Though the NSA numbers clearly lagged previous years, during the first four months of 2008, there isn’t a true “code red” result until May (possibly) or June (definitely). So if you’re looking for “significant” decline in employment, it didn’t happen until one of those two months.
Here, in their own words, are NBER’s own internal contradictions relating to “real income” and other indicators:
The income-side estimates (of Gross Domestic Income) reached their peak in 2007Q3, fell slightly in 2007Q4 and 2008Q1, rose slightly in 2008Q2 to a level below its peak in 2007Q3, and fell again in 2008Q3.
Our measure of real personal income less transfers peaked in December 2007, displayed a zig-zag pattern from then until June 2008 at levels slightly below the December 2007 peak, and has generally declined since June.
The Federal Reserve Board’s index of industrial production …. peaked in January 2008, fell through May 2008, rose slightly in June and July, and then fell substantially from July to September.
Sorry, guys. None of those impacts is “significant.”
What’s more, two key measurements relating to production directly and forcefully contradict NBER’s final excerpted assertion about production, and another data set contradicts NBER’s assertion about incomes.
First, production (Census Bureau source page; see “Historic Timeseries – NAICS” spreadsheets for “Shipments” and “New Orders”):
From November 2007, just before NBER’s alleged recession began, until June 2008, the last month before the recession as normal people define it began, both manufacturing new orders and the total value of shipments increased by what most people would consider pretty significant amounts and percentages (I confirmed with the Census Bureau that these are seasonally adjusted numbers – the “A” at the beginning of the abbreviation stands for “Adjusted”).
For NBER’s benefit, this is the kind of data one sees during an expansion. Yes, there was a decline in both numbers in early 2008, but they both recovered to a level that was higher than the previous November. In other words, June 2008 represents the true peak for these values. If you want to see when the REAL kick-in-the-pants recession began, look at the Census Bureau’s rock-like drops in August 2008 and subsequent months for shipments and orders. That of course happens to be shortly after the Era of Business Uncertainty yours truly has referred to as the POR (Pelosi-Obama-Reid) Economy for over two years began.
The NBER relies on production data from the Federal Reserve, which shows downward trends during the period indicated, instead of the Census Bureau. In the absence of someone making a convincing case why the Fed’s data is better, the worst anyone could say after seeing the two sets of results is that the economy was really, really flat until mid-2008 — but not in a recession.
Inflation-adjusted disposable income kept going up until the third quarter of 2008. Inflation-adjusted personal income excluding transfer receipts didn’t drop until the second quarter of 2008. No case for a recession during the first quarter of 2008 emerges from this income data; perhaps one can be made for it beginning in the second quarter, but it would be pretty weak in any event.
So, let’s summarize (and add a little):
- GDP — didn’t begin a long-term or significant decline until 3Q08.
- Employment — became problematic at what would be considered a recessionary level in May or June 0f 2008.
- Industrial order and sales — convincingly up according to the Census Bureau through June 2008, dropping steeply after that. Federal Reserve data largely contradicts this. At best, it’s a wash, but the burden of proof is on those who would say the Fed is somehow more right than the Census Bureau.
- Institute for Supply Management’s (ISM’s) Non Manufacturing (i.e., “Services” index; data is at this link) — was in serious contraction in January 2008, went barely into expansion from February through May, went barely in contraction during the next two months, and dropped seriously after that. That’s not impressive, but it’s also not recessionary.
- ISM’s assessment as to whether the economy was growing — stayed positive until roughly August 2008 (can’t find data right now, but I definitely recall that the assessment stayed positive until at least that month). This completely contradicts NBER.
Thus, the case that the economy was in recession from December 2007 through April 2007 hasn’t been made, and probably will never be, because there’s not enough support for the claim. The case that the economy might have been in recession during May and June is weak at best. The case that the economy was in recession from July 2008, shortly after the inception of the POR Economy, until June 2009 is of course overwhelming — which is why we should be relying on the “normal people” definition of a recession and not the arbitrary constructs of academics who possibly have agendas other than presenting the truth.