Recession’s Possible End Date Just Got Even Murkier

15 Aug

By Kelly Evans

For several weeks now, a small but unofficial increase seen in U.S. gross domestic product in May has provided a possible kernel of evidence that the current recession — which began in December 2007 — ended in that month.

Today, however, the firm responsible for monthly GDP revised the 0.3% annualized growth originally seen in May to zero, while reporting GDP declined in June as well, by 0.1%. What does it mean? That the recession might not have ended in the second quarter after all.

July is now emerging as the month to watch. Based on data collected so far from various facets of the economy, Macroeconomic Advisers, a St. Louis forecasting firm that produces the unofficial tally of monthly GDP, and most others see the economy expanding at nearly a 3% annualized rate in the third quarter, and economists in the Wall Street Journal’s latest forecasting survey now see July on average as the ending month of the recession.

There are no “official” metrics that determine when recessions begin and end. The typical rule of thumb — two consecutive quarters of contracting gross domestic product — isn’t accepted by most experts. In the U.S., at least, recessions officially begin and end when the National Bureau of Economic Research’s business cycle dating committee — which is comprised of a handful of prominent economists — says so.

Officially, they write that “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”

While that broad description is of little help to those looking for specific ways to determine whether the current recession is over, the committee’s dating of the last several recessions does reveal a couple rules of thumb:

(1) Recessions begin when nonfarm employment starts to decline — that is, when the economy begins to shed jobs each month, and
(2) Recessions end when the economy returns to growth, as measured by monthly gross domestic product

The latter reason is why economists watch monthly GDP figures so closely near the end of recessions. But even if July does begin to emerge as an inflection point for the economy, don’t expect the NBER to weigh in anytime soon: the committee likes to wait as long as possible until data on all corners of the economy are fully available and have finished being revised. For example, they didn’t declare the December 2007 starting point of the current recession until December 2008.

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