NBER DECLARES U.S. RECESSION

The National Bureau of Economic Research declared Nov. 26 the U.S. economy officially entered recession eight months ago in March 2001.

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"
or "referee" if you are a sports fan) of when recessions begin and end.

The panel's statement read, "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 chronology." The NBER's full
statement can be viewed at: http://cycles-www.nber.org/cycles/november2001/recessnov.html

The choice of March 2001 is based on current employment data, which peaked that month. The NBER terms current employment "probably the single most reliable indicator." The panel appears to rely on a San Francisco Federal Reserve report (http://www.fbsf.org/publications/economics/fedviews/index.html) that also emphasizes the "labor side," i.e., current employment data.

Senior Research Advisor Glenn Rudebusch wrote in early November, "The end of the current episode line shows the 415,000 jobs lost between September and October of this year. This decline was particularly steep, but employment has been falling since March which is used here as the latest business cycle peak. (The NBER dating committee has not yet made a designation.) From March to September, the declines in payroll employment were too shallow to indicate a recession; however, with the October data, employment has already fallen about 3/4 of a percent from the peak, a good deal of the average recessionary decline."

I date the recession's onset to January or February 2001 based on contraction of industrial production, including manufacturing output, and other factors cited in earlier Arkansas Policy Foundation reports. At the time industrial production had already peaked (September 2000); it has never contracted more than four consecutive months since 1960 without recession taking place. Its ongoing decline was more severe than three postwar recessions (1969-70, 1980 and 1990-91) when the NBER acted.

Industrial production, for me, is a more accurate indicator because it emphasizes the "business (entrepreneurial) side" of the economy. It could even 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. Mises was the 20th Century's most underrated economist. He was the first to predict socialism would not work due to the absence of a price system, an analysis that led to his persecution by
Nazi and Soviet totalitarians. Along with Friedrich Hayek, the 1974 Nobel Economics laureate, Mises also
developed a highly technical analysis of the business cycle explaining its origins in the credit and manufacturing sectors.

Mises wrote in Human Action, his magnum opus (Yale University Press, 1949):

"The editors of the financial and commercial chronicles were right when--for more than a hundred years--they looked upon production figures of these industries (heavy industries, durable producers' goods, etc.) as well as of the construction trades as an index of business fluctuations. They were only mistaken in referring to an alleged "overinvestment." (p. 560) (Note: versus "malinvestment," an error that arises from a misinterpretation of interest rates, even credit structure, in the cycle's expansion phase.)

Some economists today ascribe more importance to mathematical models than to real world data like industrial production (Federal Reserve); durable goods orders (U.S. Census Bureau); and purchasing manager
reports (Institute for Supply Management). Still others prefer current employment as the key indicator. Mr. Rudebusch observes, "Another important monthly indicator is industrial production which typically falls just over 5 percent during a recession. In the current episode, industrial production peaked in September 2000 and has undergone a sustained and significant decline since then. This decline clearly matches the typical recessionary performance of manufacturing, but it has not been mirrored by the rest of the economy, notably employment." Industrial production, through October 2001, had declined more than six percent from its pre-recession peak.

Elsewhere in his report Mr. Rudebusch notes "an important dichotomy in the economy between households
and businesses. Households appear more optimistic and more willing to spend, while business confidence
appears to have been weakened if not shattered." Yet the question, 'Could entrepreneurs know more than
households?' is never asked. The better an entrepreneur's forecasting abilities the greater the profits. By contrast, poor forecasters do not survive long and are forced out of business or into bankruptcy.

The NBER's formal declaration of recession is an important reminder that business cycles exist. The problem is not the alleged "underconsumption by consumers" cited by some politicians and Keynesians. Retail sales are generally among the last and least of all indicators to decline in a recession. Rather, incentives must be created for entrepreneurs to risk capital once again. It will take fiscal stimulus (tax cuts) to move the U.S. economy forward. There is less sympathy for this position in Little Rock than in Washington where the Bush Administration is promoting fiscal stimulus to boost investment.

--Greg Kaza