Is the US in Recession in 2008? YES

[Updated as of November 26 data; on December 1, 2008, the NBER announced that in December 2007 a recession started.  I will no longer update this article with but I will write more about the recession here.]

Many market analysts (e.g., Warren Buffett, Martin Feldstein and Alan Greenspan), have argued that the U.S. economy is in a recession. These pronouncements are relayed to the public without a clear definition of what a recession is and who actually determines whether the U.S. is in a recession. The common definition of two negative quarters of GDP growth is not correct, despite its widespread acceptance in the financial press.

This essay will explore the precise definition of a recession and provide a regularly updated view of the data that the committee that determines recessions will look at.

The NBER business cycle dating committee makes the official determination of when a recession starts (the peak of the previous economic cycle) and when one ends (the trough). On their site they write:

“The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in 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 committee track four specific indicators:

(1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.

The committee also looks “at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers” but notes that “there is no fixed rule about which other measures contribute information to the process.”

Here are the most recent data for the four key series that the NBER follows:

Date Real Personal Income Employment Ind Prod Sales
September 2007 8504.5 137837 112.3 973,028
October 2007 8507.5 137977 111.8 979,520
November 2007 8498.9 138037 112.3 973,785
December 2007 8495.0 138078 112.4 963,243
January 2008 8466.1 138002 112.6 968,367
February 2008 8464.9 137919 112.3 954,429
March 2008 8465.1 137831 112.0 954,909
April 2008 8435.2 137764 111.4 965,041
May 2008 8420.8 137717 111.2 962,718
June 2008 8384.1 137616 111.3 960,562
July 2008 8358.3 137550 111.4 952,280
August 2008 8370.6 137477 110.1 939.032
September 2008 8336.6 137138 105.9 921,459
October 2008 8424.7 136899 107.3 NA

Source: Department of Commerce, Bureau of Labor Statistics, Federal Reserve Board and author’s calculations; real personal income in billions of chained 2000 dollars, employment in thousands, and sales in billions of chained 2000 dollars.

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Here are the same data expressed as a percentage of September 2007 values (some analysts have claimed that September 2007 represented a peak in the economy; in any event, values can be compared with January 2008 levels, claimed by others as a peak). The drop associated with the average of the last five recessions prior to 2001 is indicated at the bottom of the table in red.

Date Real Personal Income Employment Ind Prod Sales
September 2007 100.0 100.0 100.0 100.0
October 2007 100.0 100.1 99.6 100.7
November 2007 99.9 100.1 100.0 100.1
December 2007 99.9 100.2 100.1 99.0
January 2008 99.5 100.1 100.3 99.5
February 2008 99.5 100.1 100.0 98.1
March 2008 99.5 100.0 99.7 98.1
April 2008 99.2 99.9 99.2 99.2
May 2008 99.0 99.9 99.0 98.9
June 2008 98.6 99.8 99.1 98.7
July 2008 98.3 99.8 99.2 97.9
August 2008 98.4 99.7 98.0 96.5
September 2008 98.0 99.5 94.3 94.7
October 2008 99.1 99.3 95.5 NA
Recession Level NA 98.9 95.4 NA

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

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Then NBER has described the typical recession:

A recession involves a substantial decline in output and employment. In the past 6 recessions, industrial production fell by an average of 4.6 percent and employment by 1.1 percent. The Bureau waits until the data show whether or not a decline is large enough to qualify as a recession before declaring that a turning point in the economy is a true peak marking the onset of a recession.

As noted above, data as of October 2008 (industrial production and employment) are very close to recession levels and a recession is likely to be declared by the NBER in the next month or two.

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