Wall Street History
Calling A Recession
On November 26, the National Bureau of Economic Research
(NBER), a non-partisan group of academics considered to be the
authority on "dating" business cycles, declared that the longest
running expansion in U.S. history (120 months) was over as of
March 2001. This is ''Wall St. History'' in its clearest form, so
let''s examine how the bureau reached its conclusion.in its own
words, as stated in the release accompanying the announcement.
Following are excerpts.
The NBER''s Business Cycle Dating Committee has determined
that a peak in business activity occurred in the U.S. economy by
March 2001. A peak marks the end of an expansion and the
beginning of a recession. The determination of a peak date in
March is thus a determination that the expansion that began in
March 1991 ended in March 2001 and a recession began. The
expansion lasted exactly 10 years, the longest in the NBER''s
A recession is a significant decline in activity spread across the
economy, lasting more than a few months, visible in industrial
production, employment, real income, and wholesale-retail trade.
A recession begins just after the economy reaches a peak of
activity and ends as the economy reaches its trough. Between
trough and peak, the economy is in an expansion. Expansion is
the normal state of the economy; most recessions are brief and
they have been rare in recent decades.
Because a recession influences the economy broadly and is not
confined to one sector, the committee emphasizes economy-wide
measures of economic activity. The traditional role of the
committee is to maintain a monthly chronology, so the
committee refers almost exclusively to monthly indicators. The
committee gives relatively little weight to real GDP because it is
only measured quarterly and it is subject to continuing, large
[Note: Of course this last point refers to the primary difference
between what the NBER does and the more common definition
of a recession, that being two negative quarters for GDP in a
The broadest monthly indicator is employment in the entire
economy. The committee generally also studies another monthly
indicator of economy-wide activity, personal income.In
addition, the committee refers to two indicators with coverage of
manufacturing and goods: (1) the volume of sales of the
manufacturing and trade sectors stated in real terms, adjusted for
price changes, and (2) industrial production..
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
Employment reached a peak in March 2001 and declined
subsequently.Through October, the decline in employment has
been similar to the average over the first 7 months of recessions.
The cumulative decline is now about 0.7 percent, about two-
thirds of the total decline in the average recession..
Industrial Production: A peak occurred in September 2000 and
the index declined over the next 12 months by close to 6 percent,
surpassing the average decline in the earlier recessions of 4.6
percent.Manufacturing and trade sales reached a peak almost a
Personal Income: This measure has continued to rise in recent
months and has not yet reached a peak..
The data continue to show substantial declines in real activity in
manufacturing, the sector reflected in the industrial production
index, and in real manufacturing and trade sales. Aggregate
employment has fallen substantially as well. Among the four
indicators, only income has behaved differently over the past 7
months from recession averages.
The committee is satisfied that the total contraction in the
economy is sufficient to merit the determination that a recession
is underway. The committee makes this determination by asking
itself hypothetically what decision it would make if a turnaround
in the economy started just after the most recently observed data.
If, despite such a turnaround, the episode would qualify as a
recession, the committee moves ahead to the second step, the
determination of the peak. Prior to the arrival of the data for
October 2001, the committee was not sure that the contraction
met the criterion. With a cumulative decline in employment
approaching one percent and the very large decline in industrial
production, the committee has concluded that the criterion has
been met now.
The determination of the date of the peak in economic activity
was as challenging as usual..
Though manufacturing often leads other sectors, the lead in the
current turning point was a little larger than normal. Industrial
production peaked in October 2000. For 5 months, until March,
the economy outside of manufacturing was expanding faster than
manufacturing was shrinking, so that total employment
continued to grow. Though the committee considered earlier
dates to reflect the divergent paths of manufacturing and the rest
of the economy, we determined that the peak should track the
behavior of the overall economy.
The committee also determined that the continued growth of real
personal income after March 2001 was consistent with the
finding of that date as the peak in economic activity. Real
income is not precisely a measure of activity rather it measures
the command of households over resources. During the relevant
period, continuing fast growth in productivity and sharp declines
in the prices of imports, especially oil, raised purchasing power
while employment was falling.
Q: The NBER has dated the beginning of the recession in March
2001. Does this mean that the attacks of September 11 did not
have a role in causing the recession?
A: No. Before the attacks, it is possible that the decline in the
economy would have been too mild to qualify as a recession.
The attacks clearly deepened the contraction and may have been
an important factor in turning the episode into a recession.
Q: The financial press often states the definition of a recession as
two consecutive quarters of decline in real GDP. How does that
relate to the NBER''s recession dating procedure?
A: Most of the recessions identified by our procedures do consist
of two or more quarters of declining real GDP, but not all of
them. According to current data, real GDP declined for the first
time in the third quarter (July - September). We will not have
data for the fourth quarter until January, though current forecasts
call for another decline. Our procedure differs from the two-
quarter rule in a number of ways. First, we use monthly
indicators to arrive at a monthly chronology. Second, we use
indicators subject to much less frequent revision. Third, we
consider the depth of the decline in economic activity. Recall
that our definition includes the phrase, "a significant decline in
Q: How do structural changes in the economy in the 1990s affect
the NBER''s method for dating business cycles? The Bureau
notes that industrial production measures a declining part of the
economy. What other substitutes for output bear watching,
particularly with regard to service sector activity?
A: Economy-wide employment and real personal income are the
most important monthly indicators. At a quarterly frequency,
real GDP is informative. Another interesting monthly indicator
is aggregate hours of work.
Q: Regarding movements of income as an indicator of
recessions, isn''t it true that real income has not fallen
substantially during five of the past nine recessions.
A: That is why employment is probably the single most reliable
The six members of the NBER are:
Robert Hall / Stanford University
Martin Feldstein / Harvard University and president of NBER
Jeffrey Frankel / Harvard University
Robert Gordon / Northwestern University
Victor Zarnowitz / University of Chicago
Ben Barnanke / Princeton University
The average post-World War II recession has lasted 11 months.
[The average expansion, 50 months.] So if you believe that we
are almost 9 months into the current downturn, you can build a
case that a recovery is just around the corner. [I''ll save my
personal comments on this for my "Week in Review" column.]
Recent Economic Cycles
July 1990 - Feb. 1991: 8 months
July 1981 - Oct. 1982: 16 months
Jan. 1980 - June 1980: 6 months
Nov. 1973 - Feb. 1975: 16 months
Dec. 1969 - Oct. 1970: 11 months
Mar. 1991 - Mar. 2001: 120 months
Nov. 1982 - June 1990: 92 months
July 1980 - June 1981: 12 months
Mar. 1975 - Dec. 1979: 58 months
Nov. 1970 - Oct. 1973: 36 months
Source: National Bureau of Economic Research.