In an exchange of ideas with my editor the other day, he asked simply: How and when will we know that the recession is over?
That’s a good question, particularly in a recession so mild there are not many visible signs of hard times. To give a satisfactory answer requires acknowledging that there are at least three sets of issues here.
Is there any official declaration of a recession beginning or ending?
What sort of events or indicators will tell knowledgeable analysts that the slow-down is ending?
What will convince the general public?
The first issue is quite straightforward and not particularly satisfying. We’ll know that the recession is over when economists or economic indicators tell us it is. There’s no official government definition of “recession” the way there is for “GDP” or “unemployment.”
However, one common unofficial definition is two consecutive quarters of decline in output as measured by GDP. By that measure, we aren’t even in recession yet.
Output did decline moderately in the third quarter–July through September of 2001—but the initial figures for the fourth quarter showed very anemic, but positive, growth. Those initial figures, tabulated just a couple of weeks after a quarter ends, are often revised significantly when more data comes in, so revised numbers may confirm that 2001 indeed ended in recession.
In addition to the “two-quarter” rule, the National Bureau of Economic Research, a non-governmental body that contains some of the brightest minds in U.S. economics, has a committee that determines business cycles.
This committee looks at more nuanced and numerous indicators than just GDP. Late last year this committee announced that we were in a recession that had started in March. It will similarly announce when the recession ends, but only some months after it happens.
The second question, what are visible signs of recovery, is also straightforward and probably more useful.
There are many indicators of economic activity, some compiled by government agencies and others in the private sector. Some indicators give better information about what the future is likely to hold than others. These are called “leading indicators.” They’re like the train whistle that I heard as a kid long before the train actually rounded the curve in the valley and crossed our farm.
A private nonprofit business-sponsored institution called the Conference Board releases an Index of Leading Indicators.
The index is a mathematical composite of 10 separately tabulated indicators including initial claims for unemployment, interest rate spreads, building permits and average hours worked in manufacturing. The entire list and explanations of the methodology used are available at www.conference-board.org.
The index, like the consumer price index or a stock index, is a unitless number that moves up and down in comparison to some base year. A rising index presages an improving economy; a falling one warns of economic worsening.
In its January 22 release covering December 2001, the index rose to 111.4, compared to a base of 100 in 1996. That was the third consecutive monthly rise and is a strong indication the recession is ending.
When economists look for turning points, they usually also look at indexes of consumer sentiment, since consumer spending is the most important component of output, and at the results of national and regional surveys of corporate purchasing managers. Like the Conference Board’s numbers, consumer confidence and purchasing manager results are tabulated and released monthly.
Indexes and statistical series may not satisfy the average citizen, however.
Going into this recession the general public was bombarded with news stories about large layoffs, falling corporate profits, reduced tax revenues, weak and edgy stock markets and rising unemployment rates. The mutterings of tweedy professors do not necessarily offset months of apparent bad news.
Unfortunately, new hiring seldom attracts the media attention that a large layoff does. Moreover, increases in hiring and decreases in unemployment rates tend to lag other indicators of recovery. So employment news may continue to be negative some time after the recession is pronounced dead.
Nor should people expect the recession’s end to bring a return to the seemingly inexorable stock market gains that prevailed in the last half of the 1990s. By historical standards, the market still is highly overpriced relative to earnings.
Economic recovery eventually will bring stronger earnings that will narrow extended price-to-earnings ratios somewhat, but ever-higher share prices simply are not in the cards.
Ultimately, the word “recession” has a personal meaning. It starts when one begins to have serious concerns about his or her own economic prospects. It ends when those concerns disappear.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.