The NBER has finally declared that the recession of 2007 to 2009 ended in June 2009.  As we noted here last year the economic data that the NBER use to track the recession turned up indicating that the recession ended in the summer of 2009. There are two brief points I would like to review: (1) understanding what the end of the recession means and (2) why there was some uncertainty about when it ended.

The NBER has a particular view of the nature of economic dynamics; they believe that the economy experiences a series of expansions and contractions whose starts and ends they can clearly identify.  The reason that their findings are announced so far after the actual event (identifying the trough or cyclical bottom that occurred in June 2009 over a year later) is that they now believe that a new cyclical upturn started.  Any significant drop in economic activity later this year (a so-called double dip) would now be part of a different recession.  At some point in the future there will be clear evidence that a peak in economic activity has occurred and that the various indicators used by the NBER are declining.  The expansion that began in June 2009 will have ended

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, and the NBER will then identify the start of the next recession.

My uncertainty about the dating of the recession and the reason that the NBER found that the recession ended a few months before my post indicated was that the NBER used some new data that they had not previously used. The new NBER data, monthly GDP estimates not publicly available, hit bottom sooner than the other data, thus they declared the end of the recession at the end of June rather than later in the summer when the rest of their data hit bottom.

[Note to readers] The economic upturn has had many consequences, including a refocusing of my energies on other projects besides this site.  Future posting is highly uncertain and may occur as Milton Friedman said of monetary policy “with a long and variable lag”.  Readers wishing my views on specific issues can contact me at cole@understandingthemarket.com .

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The Recession is over (as of June 2009)

In an earlier essay I tried to explain President Obama’s notion of saving or creating jobs.  The stimulus plan bill was passed by both houses of Congress last night and the final plan was a bit smaller than the earlier version, so the President now asserts that the plan will save or create 3.5 million jobs.

This post will track the 3.5 million jobs.  There are a number of ways to measure jobs in the US.   Some people work several different jobs at a time while others change employers frequently, so measuring jobs is not as simple as it might seem.  There was a cartoon from the Clinton era showing the President speaking at a dinner that he had created 8 million jobs and an overworked waiter thinking that he had three of them.  Obama’s economic team define jobs as use the payroll data (see here for their original report).

Just before the stimulus bill passed the Department of Labor issued a report (see here).  The number of people working (see Table B1, about 2/3 of the way down, with the heading “Establishment Data”) was 134,580,000 (seasonally adjusted).  This is a preliminary measure and will be revised next month and probably revised again in a year.  Using the Obama team methodology

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, without the stimulus bill employment would be expected to fall by around 1,613,000 jobs during the next two years so that without the stimulus bill we would expect employment to be 132,967,000 in January 2011.

With the revised estimate of 3,500,000 jobs “saved or created”, employment should be 136

,467,000, creating 1,887,000 in addition to the 1,613,000 jobs saved.

[Note I have revised the table format since the original post to make the tracking easier]

The table below will be updated with every new employment release to see how jobs have changed.  The first column is the actual number of payroll jobs starting with the month before the stimulus plan passed; the second column is the total change in employment since the month when the stimulus plan passed and the third column shows the gap remaining of jobs to be “created” in order to reach the target.

On March 6, 2009, the BLS released the revised January job numbers and the preliminary February numbers. I have revised the table to reflect these data. The loss of 651,000 jobs in February means that there will have to be an increase in jobs of a bit over 2.5 million over the next 23 months (111,000 per month) to reach the target number of jobs.

[update] On April 3, 2009, the BLS released preliminary March data (the change in February was unrevised). The loss in jobs means that there will have to be an increase in jobs of 3.2 million (148

,000 per month) in the next 22 months to reach the target.

[update] On May 8, 2009, the BLS released preliminary April data. The loss in jobs means that there will have to be an increase in jobs of 3.8 million (181,000 per month) in the next 21 months to reach the target.

[update] On June 5, 2009, the BLS released preliminary May data. The loss in jobs means that there will have to be an increase in jobs of 4.1 million (194,000 per month) in the next 20 months to reach the target.

[update] On July 3, 2009 the BLS released preliminary June data. The loss in jobs means that there will have to be in an increase in jobs of 4.5 million (225,000 per month) in the next 19 months.

[update] On August 7, 2009 the BLS released preliminary July data. The loss in jobs means that there will have to be an increase of jobs of 4.7 million over the next 18 months to reach the target.

[update] On September 4, 2009 the BLS released preliminary August  data. The loss in jobs means that there will have to be an increase of jobs of 5 million over the next 17 months to reach the target.

[update] On October 2, 2009 the BLS released preliminary September data.   The loss in jobs means that there will have to be an increase of jobs of 5.3 million over the next 16 months to reach the target.

[update] On January 8, 2010 the BLS released preliminary December data.  The loss in jobs (following a small revised increase in November) means that there will have to be an increase of 5.3 million jobs over the next 13 months to reach the target.

Technical note:  The Obama team issued their forecast in January before the release of the January employment data; expectations were for January employment to be down around 500,000.  One could infer that the Obama team expected such a job loss and that they actually now expect a loss of only 1.1 million jobs over the next 23 months, changing the number of jobs created relative to jobs saved.  But as I have not seen a revised version of the CEA memo reflecting the 3.5 million number (and in fact the White House still provides links to the 4 millions job memo), I will make the calculations in a way that provides a “best case” to the Obama team.  If there is a revised version of the memo to show the 3.5 million job estimate (with a revised forecast)

, please send me a note to ckendall at-sign umrkt dot com and I will update this page accordingly. [Update May 13, 2009: The President's staff is still using the 3.5 million number, see here in Chapter 2]

a

Tracking the 3.5 million jobs President Obama will save or create

The unemployment rate typically continues to rise for a few months after recessions end, but in recent years the timing seems to have changed.  After the end of recessions from 1948 until the 1980s, rapid economic growth followed quickly with a sharp improvement in unemployment.  But after the last two recessions (recessions that ended in March 1991 and November 2001) there was a considerably longer period before the economy grew rapidly and unemployment fell.  This article will document this finding.

During recessions, the economy slows and the rate of unemployment rises. When a recession ends and the economy starts to grow, there is often a period of a few months (or more) until the unemployment rate falls.  I believe that the data indicate that the recession that started in December 2007 probably ended in July or August of 2009 (see here for the data), but the NBER, the agency that determines when recessions end, may not make an official decision until the evidence is much clearer

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, probably sometime in 2010 or 2011.

If the recession did end in the third quarter of 2009, when will the rate of unemployment fall?  As I write, in early January 2010, unemployment is around 10%, somewhat higher than it was when the recession ended.  There is a rough rule of thumb that the economy must grow around 3% to generate enough jobs to keep the rate of unemployment constant (see here for a more detailed analysis).  The economy grew at 2.2% in the third quarter of 2009

, so it is not surprising that the unemployment rate continued to rise.

Here is a table that lists the end dates of the postWorld War II recessions, the lag from the end of the recession until the GDP grew above 4% and the change in the unemployment rate in the twelve months following the recession.  The 4% level was chosen as representing a rate of growth sufficient to substantially decrease the unemployment rate.

Sources:  NBER

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, BEA and BLS (data obtained from FRED).

Following the recession that ended in October 1949 (during the fourth quarter)

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, the economy grew at 17.2% in the first quarter of 1950, one quarter later.  Twelve months later, in October 1950, the unemployment rate was 4.2%, 3.7% lower than the 7.9% when the recession ended.

For the period from 1945 to the 1980s, the economy grew relatively rapidly (above 4%) shortly after the recession ended. In the year following all but one of these recessions

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, the rate of unemployment dropped, usually around 1 to 2%.

If the recession that ended in 2009 were a typical 1940s/1980s recession, then we would expect the rate of unemployment to decline from the 9.7% level in August 2009 to around 8% in August 2010.  But if the recession is of the 1990s/2000 variety, then it would not be surprising to see 9-10% employment in late 2010.

a

After the recession ends, when will unemployment fall?

On December 1, 2008, the NBER announced that a recession in the US started in December 2007 (for more about how the NBER came to this conclusion, see here; for the NBER announcement, see here). [Note that after this article was initially posted, the data have been updated and the table includes updates; see below for details.]

The NBER described the five monthly series which they have followed, (1) payroll employment, (2) real personal income less transfer payments, (3) real manufacturing and wholesale-retail trade sales, (4) industrial production, and (5) employment estimates based on the household survey.  This last measure is not included in their prior research

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, but generally is similar to the payroll employment number.

Here are these data expressed as a percentage of December 2007 values, the date that the NBER denoted the peak of the previous business cycle.

Source: Department of Commerce, Bureau of Labor Statistics, Federal Reserve Board and author’s calculations; all data expressed as percentage of December 2007 values.

———————————

The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, and these data indicate the economy is in recession.  All five indicators have been in decline for more than a few months

, with their peaks coming between September 2007 (real Personal Income) and April 2008 (household employment).

Now that we know that a recession has started, the question is when the recession will end.  I will continue to update this table with current data; as of the most recent data (November 2008), the recession continues.

[Update Dec 25 2008] Just before Christmas

, the BEA released November personal income data that were up sharply (largely due to the drop in prices) almost to the level at the start of the recession; October sales data were also up.  But personal income also remained stronger than the other economic measures during the 2001 recession and sales remain well below the peak level.

[Update Jan 11 2009] Employment data are still very weak; a benchmark revision to the household employment number is now presenting a similar picture to the payroll data.

[Update Feb 1 2009] Sales and Industrial production continue to fall; personal income is steady, not much below the level at the start of the recession, but this measure did not track other variables during the 2001 recession either.  One wonders why the NBER still include personal income in their analysis.

[Update Feb 12 2009] Employment continued to fall in January; further, a benchmark revision of the payroll employment data make the payroll job loss steeper than it had been.  The BLS does not revise the previous household numbers, but the sharp drop in the household number between December 2008 and January 2009 is in part due to the revision (see here for more).

[Update Feb 19 2009] Industrial production continues to decline.

[Update March 2 2009] PI was revised higher but the latest numbers are down; sales continue to decline.

[Update March 8 2009] Continued weak employment numbers with a slight downward revision for the payroll data.

[Update March 16 2009] Continuing weak industrial production with a slight downward revision.

[Update April 1 2009] Continuing weak personal income and sales data.

{Update April 3 2009] Continuing weak jobs data

[Update April 16 2009] Annual revision of industrial production is mostly negative; IP is revised down for most of the last 18 months and now has a peak coincident with the recession.

[Update May 4 2009] Personal income continues to decline; real sales had a modest rise in February but remains at a low level.

[Update May 8 2009] Payroll employment continues to decline but household employment turns up slightly.

[Update May 15 2009] Continuing weakness in industrial production.

[Update June 7 2009] Little sign of any improvement; perhaps the rate of decrease is slowing

, but no evidence of improvement in sales or employment.  Personal income is up a bit, but largely due to increased  payments by the government.

[Update June 16 2009] Continuing weakness in industrial production

[Update June 30 2009] Personal income remains weak; the increase in the headline number was caused by the increase in transfer payments which the NBER number subtract from the total.  Sales are also weak.

[Update July 2 2009] Another weak employment report, with both household and payroll numbers weaker.

[Update August 4 2009] Personal income numbers have been revised greatly changing the behavior of this series see here for details.  Revisions were largely negative.  IP is still weak; sales data will be revised in the next few days.

[Update August 14 2009] The sales data have been completely revised showing a modestly more serious decline during the recession period.

[Update August 28 2009] Both Industrial Production and Personal income are up in July (positive data will be indicated in bold); this is perhaps a preliminary indication of the end of the recession.  The NBER will wait to make a declaration that the recession is over until the evidence is much clearer.  Sales data were weaker in June.

[Update September 4 2009] Employment continued to decline in August at a slower rate.

[Update October 12 2009] BEA now calculates Personal Income minus Transfers and I am using their series that is very similar to the series I calculated; modestly down in August.  Household employment dropped sharply in September and is now just about where payroll employment is.  Industrial production was up again in August (indicative of the end of the recession).  Sales were up in August

, another indicator that the recession may have ended this summer.

[Update December 29 2009] Personal Income

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, Industrial Production and Sales are all modestly up from their early summer minima.  The drop in payroll employment is close to zero, and household employment turned up in November.  All evidence seems to confirm that the recession ended in the summer of 2009, but the NBER is unlikely to declare an end until there has been a substantial increase in employment.

a

Understanding the Recession that started in December 2007

To combat the economic slowdown and credit crisis of 2007-2009, the Fed took actions that were beyond anything attempted in the last 50 years; interest rates were cut to virtually zero and the Fed massively expanded its balance sheet by purchasing (in addition to the usual Treasury Bills) Treasury Bonds and Mortgage Backed Securities from Fannie Mae and Freddie Mac.  In another article I briefly described the policy actions the Fed has taken.  This article discusses (and tracks) the possible inflationary consequences of the Fed’s actions.

Many economists believe there is an approximate relation between changes in the money supply and changes in the price level i.e.

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, inflation  (see, among many others here and here).  While the relation between money and inflation is not precise

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, few economists believe that large increases in the money supply will not eventually lead to large increases in prices.

Many economists are not worried about this relation in the short run, as they believe that while the economy is below full capacity (when output is below the maximum that the economy could produce or when unemployment is greater than normal) that monetary expansion will not result in inflation.  But as the economy recovers and output and employment recover, inflation is likely to accelerate.

So, when the economy recovers (assuming that the US will not face an extended crisis like the 1930s) the Fed will have to figure out how to undo the monetary expansion. Fed Vice Chairman Donald Kohn recently summarized the problem:

…the Federal Reserve’s actions to ease credit conditions have resulted in a tremendous increase in its assets and in bank reserves.  Some observers have expressed concern that these actions, if not reversed in a timely manner, are sowing the seeds of a sharp pickup in inflation down the road.  As I just noted, near-term prospects appear to be for a decline in inflation rather than an increase.  But my colleagues and I are acutely aware of the risk of higher inflation as the economic recovery gains speed.  We are firmly committed to acting in a way that preserves price stability

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, and we believe we have the tools to absorb reserves and raise interest rates when needed.  Moreover, we are working with the Treasury to introduce legislation that would enlarge our tool kit for moving away from the extraordinary degree of financial stimulus we have put in place when the time arrives.

This page will track some of the key variables associated with the possible inflationary surge. First, I will characterize the state of the economy, calculating how close production is to capacity.  Second, I will track several measures of the policy actions taken by the Fed and finally I will present several measures of inflation.

Source: Bureau of Economic Analysis and author’s calculations.  I assumed that the economy was at potential at 2007IV and that potential GDP grows at 0.75% per quarter (roughly 3% per year).

Source: Federal Reserve Board; Monetary Base (SA) and M2 (SA) expressed as percentage of December 2007 levels. Fed Funds represent end of month values; on December 16

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, 2008 the FOMC announced that the target rate for Fed Funds was 0 to 1/4 percent.

Source: Bureau of Labor Statistics;

So what do we see in these data?  From the first panel

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, the economy as I write (May 2009) is 6% below full capacity.  From the second panel, starting in September 2008 (after the failure of Lehman) the Fed began a major balance sheet expansion, doubling the monetary base in roughly three months as the Fed purchased assets to try to ease the problems in credit markets.  The expansion of the base has only resulted in moderate expansion of broad money and in the third panel we can see that it has had little effect

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, so far, on inflation.  The Fed has a difficult job ahead, and I will track its progress by updating these tables in coming months.

[update June 18 2009 Monetary expansion continues in May, but there is still little evidence of inflation]

[update July 15 2009 the Monetary base declines significantly]

[Update August 14 2009 some evidence of modest monetary contraction in July with little evidence of inflation]

[Update September 26 2009 inflation up as gas prices rise but core fairly stable, monetary base up but M2 contracts]

[Update December 29 2009 The output gap continues to widen (growth in the third quarter below potential), with monetary expansion continuing and a bit more inflation]

a

US Inflation After the Recession of 2007-2009

Discount rates are a way to compare the value of cash today with cash in the future [there are a number of other discount rates, including the rate that banks pay the Federal Reserve to borrow money; see here for more on the Federal Reserve discount rate].  The key insight behind discounting is that if you have cash today you could invest it and have more money in the future; so to compare money in the future with money today, you must discount the money in the future by the appropriate “discount” rate that adjusts for what you might have done with the money.

Corporations typically use discount rates to evaluate new projects; the firm must spend some money today (and possibly again in the future) and then will expect to earn a return in the future.  To determine whether the project is profitable the firm calculates whether the future cash inflows (appropriately discounted) are greater than the cash outflows (also discounted).

For corporations the appropriate discount rate is typically the weighted average cost of capital; while you can read about this in extensive detail in corporate finance texts

, the weighted average cost of capital, or WACC which is equal to the (% Debt * Debt Cost) + (% Equity * Equity Cost).

One intuition behind this equation is that the firm issues two broad classes of securities, debt and equity; investors who purchase these securities have an expectation about the rate of return that they will earn; the rate of return that investors earn is equivalent to the cost that the firm must pay to obtain these funds.  In general

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, debt is more secure and has a lower expected rate of return than equity (to learn more about calculating the expected rate of return of equity you must understand asset pricing models, but for the moment you should be able to accept that there are ways to estimate the cost of equity for different corporations and the differences in the cost reflect the different risks of the riskiness of the corporations).

A second intuition behind this equation is that the appropriate discount rate is the average cost of capital for the firm; that is

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, the firm values all cash flows as if they had the same risk as the entire firm.  If a company like Apple is designing a new product similar to their other products, they will use the firm’s WACC to evaluate its profitability.  If a firm is doing something that is not typical of what they do (i.e.

, if Apple were to open a restaurant franchise), they might decide to use a cost of capital for a representative company (in Apple’s case, a restaurant company) to reflect the different risk of the restaurant business.

As in many aspects of life, the federal government calculates a discount rate, the AFR or Applicable Federal Rate, that must be used for certain types of calculations.  See here for a description of how the AFR is calculated and when it should be used and see here for the current and historical values of the different AFRs.

a

Understanding Discount Rates

The start and end of recessions are determined by the NBER, a “private, nonprofit, nonpartisan research organization” (see here for more).  While there has been much debate about why this group has the power to determine the dating of recessions, their proclamations are generally accepted by most economists.

The NBER determines what are the peaks and troughs of business cycles, that is, the date at which the economy started to decline and the date at which the economy hit bottom and started rising again.  Their announcement of the end of the 2001 recession provides a clear illustration of their thinking:

In determining that a trough occurred in November 2001, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

The committee waited to make the determination of the trough date until it was confident that any future downturn in the economy would be considered a new recession and not a continuation of the recession that began in March 2001.

The key point to note relative to the end of a recession is that it representts the end of the decline. So the NBER will declare that the recession has ended at the point when economic activity stops declining; the obvious problem is that you can only tell that the decline has stopped when economic activity has started to rise again.

Recessions are not like sporting events

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, because the end of the match is itself uncertain.  Economic commentators often describe recesssions as V or U shaped, depending on whether the rapidity of the rise in economic activity from the bottom,  A U shaped recovery (or even worse a W or L) means that activity remains low for some time before the recovery starts; in such situations (as in 2002-2003), the NBER will delay its determination of the end of a recession until the ensuing recovery is clear and the end of the recession was announced a year and a half later.

On another page on this site I am tracking some of the variables that the NBER uses to analyze the current recession.  As of the time I am writing (June 2009) most of the variables are low and still falling (personal income has been up a bit due to the increase in transfer payments associated with the government’s stimulus plan).  The NBER will most likely wait until the evidence is completely clear

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, that is when employment, sales, income and production are all rising and well above current levels.  Forecasters seem to expect that the economy will begin to improve in the second half of 2009

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, but the evidence that the recession has ended may not be clear until a year or so later.

a

Understanding when the Recession will End

Fed Chairman Ben Bernanke is a student of the Great Depression; many commentators  (notably Milton Friedman and Anna Schwartz in A Monetary History of the United States, 1867-1960) believe that the Depression was longer than it would have been had the Fed adopted a more aggressive policy.  As the real estate bubble began to unwind there were problems in the credit market and the collapse of Wall Street institutions such as Bear Stearns and Lehman Brothers that led the Fed to act aggressively to not repeat the mistakes of the 1930s.

The time line of the current crisis in financial markets can be dated from the first problems at the Bear Stearns hedge fund in June and July 2007; economic growth slowed and the recession officially started in December 2007.  In March 2008 Bear Stearns collapsed and then Lehman followed in September 2008.

There are several ways to think about the Fed’s actions.  The primary tool that the Fed used early during the current crisis was to cut the Federal Funds rate.  The Fed had raised rates to 5.25% in June 2006 and rates remained at that level until the first rate cut (to 4.75%) in September 2007 (see here for the history of Federal Funds rate changes).  The Fed continued to cut rates six more times until rates were at 2% in April 2008.  The Fed then paused until the Lehman crisis and then cut rates twice in October 2008 and once again in December 2008 when rates reached the current target range between 0% to 0.25%.

Initially the Fed relied on rate cuts to heal the damage in the financial markets; but by late 2008 it became clear that financial markets were not responding rapidly to the rate cuts and so the Fed took further measures.  On December 16 the Fed announced:

The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.  As previously announced

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, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets

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, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.  The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.  Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.  The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Under normal circumstances the Fed conducts open market operations by buying and selling short-term Treasury instruments (for a bit more detail

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, see here), but in December 2008 they widened the range of securities to include agency and mortgage-backed bonds (bonds issued by institutions such as Fannie Mae and Freddie Mac—see here for a brief explanation—that buy mortgages from banks

, put them together in a package and then resell the package to investors).  The Fed’s goal in buying this paper was to improve conditions in the mortgage market.  The mechanism is as follows: Fannie and Freddie buy mortgages from banks and resell them to investors; the higher the price that investors are willing to pay, the lower the rate that a person taking out a mortgage will have to pay.  If buyers are reluctant to buy Fannie and Freddie paper than people who want to get mortgages will pay higher rates; but if the Fed aggressively buys this paper, then mortgage rates will come down.  So the Fed was trying to lower mortgage rates through its actions.

On March 18, the Fed provided more specific information about its actions:

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

The mechanism by which purchasing longer-term Treasuries might improve conditions in private credit markets is that the Fed will increase the price and lower the yield on Treasury bonds.  If investors are deciding whether to buy corporate bonds or Treasury bonds, the Fed’s action will make the corporate bonds look somewhat more attractive to the lower-yielding Treasuries, making it easier for those corporations to borrow in the future.

The reason that the Fed does not undertake such actions during normal times is that there is a greater risk associated with holdings of mortgage bonds (whose return depends on whether mortgages are paid off) than with Treasury paper (that the US government has always paid off).  The Fed clearly made a judgment that in this specific case (the sharp downturn in the economy and the problems in credit markets) that the risk was worth taking.

Whether this action will set a precedent for future Fed chairmen is an open question; one can easily imagine that there would be intense pressure on a future Fed chairman to purchase securities in markets that are in difficulty

, with the result that monetary policy becomes more focused in coming years on specific sectors.  The Fed has successfully defended itself from outside pressure since it regained its independence in 1951 (see here for a bit more) but when the economy is weak there is always pressure on the Fed.

To summarize, when it became clear to the Fed that the economy was slowing sharply and that credit markets were in trouble, the Fed took extraordinary action: they cut rates to virtually zero and then announced that they would buy (in addition to the usual short-term Treasuries) longer-term Treasuries and agency mortgage debt.  With luck, this will shorten the economic crisis by restoring credit markets.  But such a large expansion of the Fed’s balance sheet presents an inflationary threat that will be described in another essay.

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Monetary Policy During the Recession of 2007-2009

The Federal Reserve System is a complex organization

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, comprised of twelve regional Feds and a Federal Reserve Board in Washington, DC.  In this article I describe the terms of the Board of Governors, the group that sets Fed policy (I have written elsewhere on the structure of the Fed).

The current structure of the Board of Governors (seven members with 14 year terms) dates back to 1935; under the original Federal Reserve Act (see here)

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, there were five appointive members plus the Controller of the Currency and the Secretary of the Treasury (who was the ex-officio Chairman of the Board).

The Fed describes how the Board of Governors is nominated and how long they serve here, here and here:

The seven members of the Board of Governors are appointed by the President and confirmed by the Senate to serve 14-year terms of office. Members may serve only one full term, but a member who has been appointed to complete an unexpired term may be reappointed to a full term. The President designates, and the Senate confirms, two members of the Board to be Chairman and Vice Chairman, for four-year terms.

A full term is fourteen years. One term begins every two years, on February 1 of even-numbered years.

Upon the expiration of their terms of office, members of the Board shall continue to serve until their successors are appointed and have qualified.

Thus, as I write in early 2009, there are seven current terms, with starting dates from February, 1, 1996 to February 1, 2008. But very few Fed governors serve all fourteen years of their terms

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, and with the difficult relations between the previous President and the Senate (see, for example, here), the Fed is operating with five governors.  President Obama, with a large Democratic majority in the Senate, should have no problem filling the two empty seats.

The Feb 1996-Jan 2010 term is vacant.

Elizabeth Duke took office on  August 5

, 2008 to fill the Feb 1998-Jan 2012 term.

The Feb 2000-Jan 2014 term is vacant.

Donald Kohn took office on August 5, 2002, to fill the Feb 2002-Jan 2016 term. On June 23, 2006, Kohn was sworn in as Vice Chairman of the Board of Governors of the Federal Reserve System for a four-year term ending June 23

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, 2010.

Kevin Warsh took office on February 24, 2006, to fill the Feb 2004-Jan 2018 term.

Ben Bernanke was sworn in on February 1, 2006, as Chairman and a member of the Board of Governors of the Federal Reserve System. He was appointed as a member of the Board to a full 14-year term, Feb 2006-Jan 2020, and to a four-year term as Chairman, which expires January 31, 2010.

Daniel Tarullo took office on January 28, 2009 taking the  February 1, 2008 to January  31, 2022 term.

Presumably some time in 2009 President Obama will nominate two governors to fill the other vacant seats. But President Obama will not be able to replace Chairman Bernanke or Vice Chairman Kohn until 2010, although presumably pressure from the President could convince one or more Board members to resign before their terms expire.

a

Understanding the Terms of the Board of Governors of the Fed

President-elect Obama’s economic team says that he was developing a plan that “would save or create nearly four million jobs”.  Four million jobs is a large number; this essay will try to explain how large. (Note: earlier, Obama said his plan would “save or create at least two and a half million jobs”; later Obama used the number 3 million). [Note: As of February 12, with the final version of the stimulus bill, the number is now 3.5 million jobs; I will update the table when I find a revised report from Obama's economists.]

Depending on how you measure employment, as I write in January 2009, there are around 140 million jobs in the United States.  Calculating the number of jobs is not as simple as it seems; the labor force is constantly changing

, with some people leaving school and entering the labor force while others go back to school or retire, people being hired and fired and some people holding multiple jobs.  The Bureau of Labor Statistics calculates two measures of employment, the household measure (derived from a survey of households) and the establishment data (derived from a survey of employers); see this essay for more information on how the data are assembled.

Obama’s economic team use the payroll data (see here for their report).  As of the end of December, the BLS estimated that businesses employed 135

,489,000 workers (what the Obama advisers call “payroll employment”).  They estimate that with the Obama stimulus plan, employment will rise to 137,550,000, resulting in an increase of roughly 2 million more jobs; but without the stimulus, employment would only be 133,876,000, so the Obama plan results in almost 4 million more jobs than would otherwise be the case.

The Obama team presents these numbers as the result of forecasts of what will happen without the stimulus compared to what will happen with the stimulus.  Here are the job data for the last five recessions and the estimates for the current recession:

JOB GROWTH IN PAST RECESSIONS

Change in Payroll employment measured in thousands of workers.

To review the history of the recessions of the last 40 years; during every recession there was some stimulus

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, usually a combination of Fed rate cuts and an increase in the budget deficits. The Congressional Budget Office is already forecasting that the budget deficit in 2009 will be 8.3%, the largest deficit in the last 60 years.

The Obama team is forecasting that the recession that started in 2007, without the Obama stimulus, will be the worst recession in the last 40 years in terms of job loss

, even with the large budget deficit and the aggressive rate cuts that the Fed has already made. They forecast larger job losses during the period after the recession started than has occurred in the last five recessions.  But economic forecasts are not 100% accurate; for example, it was only a nine months ago that candidate Obama was in favor of raising taxes when he took office although he noted that “we don’t know what the economy’s going to look like at that point.” At this point his team seems much more certain about where the economy will be in a few years.

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Understanding Employment (or Obama and the 2.5 or 3 or 4 or [update] 3.5 million jobs)