Democratic partisans and some analysts are criticizing the National Bureau of Economic Research’s declaration that the U.S. recession ended 20 months ago — in November 2001. But a careful review of federal economic data reveals that the umpire made the right call.
Established in 1920, the NBER, is a private, nonprofit, nonpartisan research group. Within the economics profession its Business Cycle Dating Committee is considered the official arbiter, or umpire, of cyclical turning points in the economy. The committee found that the “recession lasted 8 months, which is slightly less than average for recessions since World War II.” The mild recession that occurred in President Bush’s first year in office was of the garden-variety sort.
With the recession officially ended, partisans have one less issue with which to attack President Bush. That has not stopped criticism of the umpire’s call. “The recession may be over for President Bush, but it’s not over for millions of unemployed workers,” said Rep. Pete Stark (Calif.), senior Democrat on the Joint Economic Committee. “As we’ve seen in Iraq, we may declare victory, but we will continue to suffer casualties from this recession.”
Lawrence Mishel, president of the Economic Policy Institute, a left-liberal Washington think tank, said this month in the Wall Street Journal, “This is meaningless from the point of view of people worried about their jobs, but meaningful for economic researchers.”
Yet federal data shows that real gross domestic product and other key indicators have grown since late 2001.
The NBER defines recession as “a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” In November 2001, the NBER, relying heavily on nonfarm payroll employment data (and a San Francisco Federal Reserve Bank analysis,) declared that the economy peaked in March 2001.
In declaring a November 2001 trough, the NBER relied upon real GDP (source: U.S. Bureau of Economic Analysis), which has grown for six consecutive quarters, and two other indicators — personal income excluding transfer payments and the volume of sales of the manufacturing and wholesale-retail sectors. GDP has risen 4 percent from its low in the third quarter of 2001, and is 3.3 percent above its pre-recession peak in the fourth quarter of 2000. Sales reached a trough in September 2001, and income hit bottom in October 2001. Measured in real terms, both indicators have surpassed their pre-recession peaks.
Industrial production (Federal Reserve System) reached a trough in December 2001, and has expanded in 12 of the subsequent 18 months. But employment has not grown, due to job losses in the manufacturing sector (see “The Clinton Manufacturing Recession“).
(Partisans imply an economy cannot be in recession if employment expands. During President Nixon’s second term, employment peaked in July 1974 yet the NBER, relying on GDP and other indicators, declared November 1973 as the recession’s starting point. Will the critics now ask the NBER to shorten the mid-1970s recession by eight months?)
Another gripe is that the umpire waited too long to make the call. The November 2001 trough means the recession ended the month it was announced by the NBER. This is not unusual. The committee is known for its slow process of declaring cyclical turns. A similar situation occurred in July 1981 when it declared an end to a six-month recession (January to July 1980) in the last year of Jimmy Carter’s presidency. Another example was the 1981-82 recession during President Reagan’s first term. The NBER announced the July 1981 peak in January 1982, and the November 1982 trough in July 1983.
The NBER’s critics are wrong to suggest partisanship. In 1992, Arkansas Democratic Gov. William J. Clinton and his campaign rallied around the theme, “It’s the economy, stupid,” insisting the U.S. was in recession. President George H.W. Bush and his supporters, pointing to GDP growth, maintained the recession that started in July 1990 was over. President Bush won the economic argument after the 1992 election when the NBER found the recession ended in March 1991. Clinton won the political argument and the presidency.
Did the NBER delay its decision to harm Republicans? No, the Committee is neutral and nonpartisan. Some people just don’t like the umpire.
— Greg Kaza is executive director of the Arkansas Policy Foundation, a non-profit economic research organization in Little Rock.