The USA will likely sink into recession in 2008, and it could be "nasty" if policymakers don't act swiftly, according to a prominent economist.
"Unfortunately, I think that there is a better-than-even chance that we are headed into a recession in 2008," Martin Feldstein, an economics professor at Harvard University and president of the National Bureau of Economic Research (NBER), told USA TODAY Tuesday.
Feldstein isn't the only economist betting on a recession — and there are plenty of others who say a downturn will be avoided.
But few other economists have the official say as to whether a recession is underway. That official verdict will come from a little-known panel of academic economists, including Feldstein, making his comments particularly important. But anyone waiting for a recession verdict will likely have to wait a good long while.
The responsibility for defining U.S. recessions falls on the shoulders of seven economists who form the Business Cycle Dating Committee at the Cambridge, Mass.-based NBER. The organization has been dating business cycles since 1929 and first formed the all-volunteer committee 30 years ago.
While recessions are often described as two consecutive quarters of decline in economic output, that's not the official definition.
Instead, the panel looks at a series of economic data, including gross domestic product, income, employment, industrial production and retail sales. There is no formal model. The economists make their judgments based on subjective discussion of the data.
The committee hasn't discussed the "R word" in the current context, says Robert Hall, a Stanford University economics professor who has chaired the recession dating panel since its inception.
That's not a surprise, even if a recession is in progress. In a memo posted on its website Tuesday, the NBER said it typically declares the start of a recession six to 18 months after it happens.
It wasn't until November 2001 that the committee said the last recession had begun eight months earlier. The panel waited until July 2003 to announce that the recession had ended in November 2001.
Panel members say they don't want to jump to conclusions, in part because data are often revised.
"The big danger we have is something would look like a recession and then turn out later not to be one because it turned out to be a minor dip," Hall says.
Too slow and too complicated?
Hall and others on the committee say their work is important for academic research. And knowing precisely when a recession starts and ends can help guide business people and economists during future downturns, Feldstein says. For example, they can use previous recessions as a rough month-by-month guide of what to expect when it comes to investment, employment and other key variables.
The procedure isn't without critics. Global Insight chief economist Nariman Behravesh argues that it takes too long and is too complicated. That can make business decisions, such as investment and hiring, tougher, says Behravesh, who says a recession is likely in the beginning stages. Most other countries follow the two-quarters-of-negative-GDP rule, he says.
But members of the NBER committee argue there are plenty of other people to speculate on recessions in real time.