This was a tough one to date for a host of reasons, many of which have been discussed on this and other blogs. So let's go to the NBER's press release for their explanation which, I think, says it quite well. I'll supply the questions... they supplied the answers.
First of all, did any of their indicators clearly indicate a peak in a specific month?
The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then.But what about GDP?
The committee believes that the two most reliable comprehensive estimates of aggregate domestic production are normally the quarterly estimate of real Gross Domestic Product and the quarterly estimate of real Gross Domestic Income, both produced by the Bureau of Economic Analysis. In concept, the two should be the same, because sales of products generate income for producers and workers equal to the value of the sales. However, because the measurement on the product and income sides proceeds somewhat independently, the two actual measures differ by a statistical discrepancy. The product-side estimates fell slightly in 2007Q4, rose slightly in 2008Q1, rose again in 2008Q2, and fell slightly in 2008Q3. The income-side estimates reached their peak in 2007Q3, fell slightly in 2007Q4 and 2008Q1, rose slightly in 2008Q2 to a level below its peak in 2007Q3, and fell again in 2008Q3. Thus, the currently available estimates of quarterly aggregate real domestic production do not speak clearly about the date of a peak in activity.
What about any other series that might shed light on the peak month?
Other series considered by the committee--including real personal income less transfer payments, real manufacturing and wholesale-retail trade sales, industrial production, and employment estimates based on the household survey--all reached peaks between November 2007 and June 2008.
In other words, GDP and GDI have been bouncing around since last fall. Other indicators all peaked at different times, but employment peaked in December.
In retrospect, the December date seems more obvious when you look at the last announcement of a peak just over 7 years ago:
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 indicator.
When there is disagreement among the indicators, it looks like the committee goes with the employment peak. That is, I think, a defensible practice since the peak of employment may often slightly lag manufacturing output declines and leads certain other indicators. File that away for future reference. And while I'm on the subject of the 2001 announcement, let me just say that I'm disappointed that the NBER did not include graphs with the latest release like they did in 2001.
Well, it was just a matter of time. I've been saying in class and publicly that we are probably in a recession and it probably began between December and June. I think the weight of evidence points to the latter part of that period, but if employment is the clincher, then so be it. File that away for next time and impress your friends with your forecasting ability.
Anyway, back to the current situation. Is the decline in activity substantial enough to merit being called a recession?
The committee determined that the decline in economic activity in 2008 met the standard for a recession, as set forth in the second paragraph of this document. All evidence other than the ambiguous movements of the quarterly product-side measure of domestic production confirmed that conclusion. Many of these indicators, including monthly data on the largest component of GDP, consumption, have declined sharply in recent months.
Yes, and more than anything it was probably the last GDP and employment figures that tipped the scale. While it is unusual for the announcement of the peak to be so long after the fact, I think they were waiting for that confirmation. Well, they got it, and there's probably more where that came from. The fact that GDP and GDI couldn't seem to make up their mind for several months seems to be what really made the call tricky. Prior to the latest round of financial market crisis this fall, there was still a faint glimmer of hope that a recession could be avoided.
But in retrospect, we had avoided recession for some time when many people thought it was right around the corner.
It was 2005 when a lot of commentators (bloggers and otherwise) started to predict doom and gloom ahead. Case in point: Calculated Risk's post of April 12, 2005 where he issued his "Mug's Game Challenge: Predict the Start of the Next Recession". Check out the guesses--most were 2005 and 2006. There were a few who said 2008 (perhaps out of the belief that any normal expansion would be running its course by then). One commenter said 2011. Even I would have labeled that wishful thinking. But the point is that nearly every one of the commenters thought a recession was imminent.
In the end, many of who spoke of doom and gloom in 2005 were at least partially right about the "why" and quite wrong about the "when".
But then, think about the previous recession which started in 2001. Were there similar manifestations of doom and gloom in 1999? Yes. Were they shouted down by the perpetual cheerleading crowd? Yes, (the book Dow 36,000 came out in 1999...remember?) Were the pessimists right about the "why" and wrong about the "when"? In some cases, yes.
Now, I'm not suggesting something as simple as saying that when the perpetual doom and gloomers come out of the woodwork you've got two years to go. That's not the point. The point is that no expansion lasts forever, and the seeds of the next recession really are sometimes sown in the current recovery. As Herb Stein put it, things that can't go on forever, won't. And perhaps 2005 is when it should have been more obvious that something was happening that couldn't go on forever.
The thing is though, realizing that fact still doesn't tell you when and how it will stop.
Coming soon: How wrong were we and what can we learn?
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