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NBER DECLARES END TO U.S. RECESSION

(July 17, 2003) The National Bureau of Economic Research (NBER), the official arbiter of cyclical turning points in the U.S. economy, declared today the recession ended nearly two years ago (20 months) in November 2001. The finding concludes debate about whether the economy was experiencing a so-called "double-dip recession." The Policy Foundation declared in March 2002¹ the recession ended in January 2002 based on various government data series.

The NBER is a private, nonprofit economic research organization based in Cambridge, Mass. Six academic economists serve on the NBER Business Cycle Dating Committee, which serves as the final arbiter ("umpire" if you are a sports fan) of when expansions and recessions (technical term: "contraction") begin and end. A contraction is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, Real Personal Income, Nonfarm Payroll Employment, Industrial Production, and Wholesale-Retail Sales.

The Committee met yesterday, and declared today, "At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in November 2001. The trough marks the end of the recession that began in March 2001 and the beginning of an expansion. The recession lasted 8 months, which is slightly less than average for recessions since World War II." The NBER's full statement can be viewed at:

http://release.nber.org/july2003.html.

The NBER's choice of November 2001 as the trough is based on the growth of Gross Domestic Product (GDP) from its low in the third quarter of 2001. It is also based on the performance of two other economic indicators: personal income excluding transfer payments and the volume of sales of the manufacturing and wholesale-retail sectors. Sales reached a trough in September 2001, and income hit bottom in October 2001. Measured in real terms, both indicators have surpassed their pre-recession peaks.

Today's statement explains, "The NBER's practice has been that if economic activity is roughly flat at the end of a recession or expansion, the turning point is placed at the end of the flat period. Although the committee concluded that it was not necessary to invoke this rule to determine that the trough occurred in November rather than September or October, the rule strengthened the committee's confidence in its determination."

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

In February 2001, the Policy Foundation declared the economy was in recession (Donrey News Service, Feb. 2, 2001) following a meeting with Gov. Mike Huckabee. APF dated the recession's onset to January or February 2001 based on contraction of Industrial Production, including manufacturing output, and other time series compiled by the U.S. government. The NBER issued a statement in November 2001 declaring the recession started in March based on the peak in total Non-Farm Payroll Employment that occurred that month.²

I believe Industrial Production³ is a more important indicator of cyclical turning points because it emphasizes the "business (entrepreneurial) side" of the economy. It could serve as a proxy for the "higher-order capital goods" that the late Austrian economist Ludwig Von Mises saw producing the first signs of "malinvestment" and, ultimately, recession in books like Human Action (Yale University Press, 1949). Mises was the 20th Century's most underrated economist, and the first to predict socialism would not work due to the absence of a price system. Mises and Friedrich Hayek, the 1974 Nobel Economics laureate, developed a highly technical business cycle analysis explaining its origins in the credit and manufacturing sectors.

Industrial Production reached a trough in December 2001 (revised) and started to expand in January 2002, a key factor behind the Policy Foundation's March 2002 declaration the recession had ended. Industrial production has expanded 12 of 18 months since December 2001.

Nonfarm Payroll Employment has not grown due to job losses in the Manufacturing private industry sector dating to March 1998.⁴

--Greg Kaza

1 APF research memo (March 2002), "Industrial Production Expands: Policy Foundation Sees Recession End In January 2002." Available in Policy Research archive at www.reformarkansas.org
2 APF (December 2001), "NBER Declares U.S. Recession"
3 The Industrial Production Index is maintained by the Federal Reserve System.
4 Nonfarm Payroll Employment is compiled by the U.S. Bureau of Labor Statistics.