Recession Gatekeepers: How an Economic Downturn Is Determined

Sept. 26, 2011 — -- The big question on Wall Street and in Washington these days is whether there's going to be another recession. Jeffrey Frankel, a Harvard professor and member of the committee that declares when a recession has started and finished, says that seems unlikely -- at least for now.

Frankel is a member of the National Bureau of Economics Research's (NBER) Business Cycle Dating Committee. Not speaking on behalf of the committee, he said the economy still appears to be slowly growing, though it is possible past GDP data could be revised.

"There were times in retrospect I would have said the same thing and I was wrong. But based on available information it's very unlikely we have gone into it," Frankel said from his office at Harvard University.

While the NBER agrees with most economists about the definition of a recession -- two consecutive quarters of a decline in real GDP -- it says not all recessions fit that bill.

In the recent recession beginning in December 2007 and ending in June 2009, real GDP declined in the first, third, and fourth quarters of 2008 and in the first quarter of 2009.

The committee carefully analyzes various economic measures such as GDP and unemployment, usually assessing months afterward whether a recession has ended or begun.

The committee announced in December 2008 that the recession began one year earlier, and it announced in September 2010 that the recession had ended -- more than one year after the fact.

While declaring the beginning and end of a recession is tricky as it is, forecasting the start of a recession is even more difficult.

"I'm not a forecaster so I certainly can't forecast a recession," Frankel said. "Even people who do it for a living can't do it well."

At least we know if the U.S. enters another recession, it will not be a double-dip recession, says the committee.

In September 2010, the committee announced that "any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date."

There are nine economists who are members of the committee, including a who's-who of some of the top economists in the country, including Christina Romer, former chair of the Council of Economic Advisers in the Obama administration. All nine have pedigrees and teaching posts from elite universities. They do not meet on a regularly scheduled basis and only as-needed. And they communicate far more by email than in person, Frankel said.

When asked what is the most important thing the public should know about the committee, Frankel said there is confusion over what the end of a recession means for the economy.

"Just because a recession is over it doesn't mean things are good. It means they are no longer getting worse," he said.

He also said the committee has slowly changed what it analyzes as the domestic and global economies have evolved.

"We put less emphasis on industrial production because it's no longer as important as it was, as manufacturing is no longer as big share of economy," he said.

He said there is more than one measure of employment, and GDP. "We have been changing the weights on some different measures," he said.

Stephen Bronars, chief economist with Welch Consulting, said the dating of a recession is "an art not a science."

A recession is a downturn in aggregate economic activity but the precise timing of the period of declining economic activity is not particularly important, Bronars said.

He said most economists are much more concerned about a prolonged period of sluggish economic growth, such as Japan's "Lost Decade," than by a recession.

"Economists understand that capital and labor is reallocated across sectors and industries in a recession. The view is that economic growth should pick up after going through the pain of a recession," Bronars said.

Poor policy decisions that could contribute to an entire decade of low or zero economic growth would ultimately be more damaging than the typical recession, he said.

Frankel said the future state of the economy may depend on whether President Obama's job bill will be passed.

"If they pass the whole thing and if more generally Washington is seen to get its act together on the fiscal situation, it would push down the odds of a recession," he said. "But if there's complete gridlock and nothing is done then the odds are higher."