Tuesday, April 13, 2010

The Economy Hit Bottom, But It Is Still Not Official

June, 2009?

Here at Mammon Among Friends, you have been reading for some time that the recession of 2007-2009 ended last June (i.e., June, 2009.)  The Business Cycle Dating Committee of the National Bureau of Economic Research (the NBER) ducked the issue, although it looks like a consensus agrees with me.  Their caution flows from a fear that we might have a repeat of 1980 and 1982 when we had either back to back recessions or one double dip recession.   The committee's decision was for the former.

I have no doubt we are well into a recovery and that the trough was June 2009.

Robert Gordon agrees: "It is obvious that the recession is over. Real GDP has recovered strongly from a trough in 2009:Q2 and by 2010:Q2 (the current quarter) will have reached (or be very close to) its value reached in the peak NBER quarter of 2007:Q4...The traditional measure of production used by the committee is the Federal Reserve Board Index of Industrial Production (IIP), which reached a well-defined trough in June 2009. For those who object that the IIP refers only to about 15 percent of the economy, the broader monthly measure real manufacturing and trade sales also reached its trough in June 2009. The private firm Macro Advisers has constructed a measure of monthly GDP that is available back to 1992, and this also indicates a cyclical trough in June 2009. While real GDI is flat across 2009:Q2 and 2009:Q3, quarterly real GDP reaches its trough in 2009:Q2, as does the average of quarterly real GDP and real GDI. Thus we have three monthly measures that reach a trough in June, the average of two measures of aggregate economic activity which reach their trough in 2009:Q2, and no clearly defined troughs occurring later than that in any series other than the traditional lagging data on aggregate hours of work and total employment."

Gordon is the senior guy on the committee now that Victor Zarnowitz is dead.   I'm in good company!

Jeffrey Frankel seems to be in the same camp. On April 5th, he blogged, "The recession is over."

What is a Recession?

A recession is a broad, sustained decline in a wide range of economic indicators. The committee has put increasing stress on GDP over the years , although not as much as they did in 1966. Still the monthly indicators are decisive and most of the coincident indicators are measures of private activity: e.g., real retail sales, industrial production, personal income minus transfer payments.

The committee's actual statement was:

"The Business Cycle Dating Committee of the National Bureau of Economic Research met at the organization’s headquarters in Cambridge, Massachusetts, on April 8, 2010. The committee reviewed the most recent data for all indicators relevant to the determination of a possible date of the trough in economic activity marking the end of the recession that began in December 2007. The trough date would identify the end of contraction and the beginning of expansion. Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months. The committee acts only on the basis of actual indicators and does not rely on forecasts in making its determination of the dates of peaks and troughs in economic activity. The committee did review data relating to the date of the peak, previously determined to have occurred in December 2007, marking the onset of the recent recession. The committee reaffirmed that peak date."

Where Are We At?  Where Are We Going?

We certainly should have a strong recovery given how far the economy fell. The first part of a recovery is when things are at their worst. Places where the housing bubble was the worst will recover more slowly.

My greater concern is that the administration's health care payment "reform" and taxing will create a second recession much like the very severe Roosevelt recession of 1937-8.  That would not be pretty.

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