Business Cycles in the NBER Business Cycle Dating Committee Framework (edition XLXIV)

Some people assert when polls of the public indicate a majority think we’re in a recession, we’re in a recession, definitionally. Some people believe that when there are two consecutive quarters of negative GDP growth, we’re in a recession. Well, any given person can define a banana as a spherical fruit, but it is sometimes useful to define what a recession is, as defined by the scholars who coined the term, or who have been understood to be the arbiters of the term in quasi official terms. From the NBER’s Business Cycle Dating Committee FAQs webpage:

Q: What is the basic job of the Business Cycle Dating Committee?

A: The NBER’s Business Cycle Dating Committee maintains a chronology of US business cycles. The chronology identifies the dates of peak and trough months in economic activity. The peak is the month in which a variety of economic indicators reach their highest level, followed by a significant decline in economic activity. Similarly, a month is designated as a trough when economic activity reaches a low point and begins to rise again for a sustained period.

Q: What is a recession? What is an expansion?

A: The NBER’s traditional definition of a recession is that it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months. The committee’s view is that while each of the three criteria—depth, diffusion, and duration—needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another. For example, in the case of the February 2020 peak in economic activity, we concluded that the drop in activity had been so great and so widely diffused throughout the economy that the downturn should be classified as a recession even if it proved to be quite brief. The committee subsequently determined that the trough occurred two months after the peak, in April 2020. An expansion is a period when the economy is not in a recession. Expansion is the normal state of the economy; most recessions are brief. However, the time that it takes for the economy to return to its previous peak level of activity may be quite extended.

Here’s a stylized graph:

Source: Model Investing.

You can see how the actual business cycle dates for the US correspond to this graphic in this chronology (NBER page). Here are the NBER dates shaded gray and the unemployment rate.

 

Notice that NBER does not plot with GDP – not because it doesn’t look at GDP – but rather because the NBER BCDC looks at a wide number of series in addition to GDP.

Jeffrey Frankel, a member of the NBER BCDC for 25 years, explains the approach in this post. He elaborates on why we are not in a recession now in this post from last week.

This is not to say NBER BCDC is the only word on when a recession starts, and when it ends. Jim Hamilton’s indicator is a measure based on GDP, with the latest assessment here. However, because the pioneering research of Arthur Burns and Wesley Mitchell (see Measuring Business Cycles, NBER, 1946) established this nomenclature of peak/trough expansion/contraction-recession, due is given the BCDC’s declarations on when recessions begin and expansions end.

Different countries will use different criteria (see this post for what agencies or organizations define contractions/expansions in other countries). The set of variables is often different (sometimes the two consecutive quarters of GDP growth), but the framework shown in the stylized graph is typically at the heart of the approach (e.g., ECRI). For instance, Laurent Ferrara’s discussion of the new chronology of the French business cycle (in this Econbrowser post) is built around this peak/trough expansion/contraction framework.

Note that nobody I know of uses sentiment indicators as an indicator for recessions (although they might correlate with recessions). Chinn (2022) notes that this correlation is not perfect.

Some key macro indicators followed by the BCDC as of today:

Figure 1: Nonfarm payroll employment (dark blue), industrial production (red), industrial production for May Bloomberg consensus as of 6/14 (red +), personal income excluding transfers in Ch.2012$ (green), manufacturing and trade sales in Ch.2012$ (black), consumption in Ch.2012$ (light blue), and monthly GDP in Ch.2012$ (pink), all log normalized to 2020M02=0. NBER defined recession dates, peak-to-trough, shaded gray. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (nee Macroeconomic Advisers) (6/1/2022 release), NBER, and author’s calculations.

Most of these indicators are rising in April and May. The exception is manufacturing and trade industry sales. This contrasts with the Lazear’s call in 2007/08 when some series were declining. Now, it’s true that these data are all going to be revised (that is, these are preliminary values for the most recent month’s data), so one has to be cautious about not being to certain. I remember in April 2001 when I was on CEA staff conversations to the effect we weren’t in a recession. Well, there were a lot of data revisions…(and NBER long after that declared a recession underway with peak at 2001M03).

Final note: you could be in a bad economic state, and still be in an “expansion” — much like 2009Q2 onward. The output gap (deviation of GDP from potential GDP) has been negative since 2008Q3, according to the latest CBO estimates of potential GDP (although it got within a percentage point in 2019Q3, and within half a percentage point in 2021Q4.