NBER DECLARES U.S.
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
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
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
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.