Is the recession dating committee preparing for a double dip?
The Big Picture has picked up on what appears to be an interesting development over at the NBER’s site. It seems like they are hedging there bets on a possible double dip recession beginning in late 2010 or 2011.
As you may know, the NBER is the organization which is responsible for the monthly dating of recessions in the United States. Back in May 2008, when Pollyannas were denying the recession, I wrote this prediction:
The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in 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. For more information, see the latest announcement on how the NBER’s Business Cycle Dating Committee chooses turning points in the Economy and its latest memo, dated 07/17/03.
So, you’ve got to look at:
- production and
- retail sales
…All the major signs of recession are there. It probably began in Dec. 2007 or Jan. 2008. The question is how long and how deep.
–US Recession Signals, May 2008
This turned out to be right on the money when the beginning of the recession was finally dated in December 2008. Now the question is when did – or when will – it end.
There has been a lot of conflicting evidenceregarding this fake, stimulus-induced recovery we are now witnessing. NBER committee member Robert Gordon of Northwestern University made statements this past Spring suggesting he sees an early recovery dating (see Jobless claims may signal the end is near from April 2009). But Martin Feldstein, another NBER dating committee member, is holding out. He said last year:
[M]y reading of the evidence does not agree with that of those who claim that … a sustained cyclical recovery is likely to begin within the next few months. … But, although the recent news is not as encouraging as some have claimed, I expect that the next few months will see some real improvements that will reduce the rate of overall economic decline, or even produce a temporary rise in the GDP growth rate, owing to the Obama administration’s fiscal stimulus measures. …
But the key thing to bear in mind is that the stimulus effect is a one-time rise in the level of activity, not an ongoing change in the rate of growth…, there is nothing to make that higher growth rate continue in the following quarters. So, by the end of the year, we will see a slightly improved level of GDP, but the rate of GDP growth is likely to return to negative territory.
The positive effect of the stimulus package is simply not large enough to offset the negative impact of dramatically lower household wealth, declines in residential construction, a dysfunctional banking system that does not increase credit creation, and the downward spiral of house prices. The Obama administration has developed policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery.
–Feldstein: Has the US Recovery Begun?, Economist’s View, May 2009
That was May, but he was still singing the same tune last month.
The U.S. economy remains mired in a recession, prospects for next year are weak and home prices may resume declines, Harvard University economics professor Martin Feldstein said.
“The recession isn’t over,” Feldstein said today in an interview on Bloomberg Radio in New York. “It will be a while before we have enough information to know if the recession ended.”
Feldstein is a former president of the National Bureau of Economic Research and remains a member of the group’s Business Cycle Dating Committee, the panel charged with determining when recessions begin and end. His comments are at odds with those of the panel’s chairman, Robert Hall, who said early this month that the recession may have ended.
–Harvard’s Feldstein Says U.S. Economy Still Mired in Recession, Bloomberg, Dec 2009
The reason he is cautious has to do with stimulus and the so-called multiplier effect. Keynesians tell us fiscal stimulus has a multiplier effect. Alan Blinder’s contribution is a good place to start on this:
If government spending increases, for example, and all other components of spending remain constant, then output will increase. Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero.
–Keynesian Economics, Alan S. Blinder, The Concise Encyclopedia of Economics
Feldstein is arguing that the multiplier effect of this fiscal stimulus is less than 1 and therefore is not sustainable. As soon as the stimulus is removed, recession will re-appear. See The Tax Rebate Was a Flop. Obama’s Stimulus Plan Won’t Work Either from the Wall Street Journal in August 2008 or Feldstein Sees Renewed U.S. Slump After ‘Improvement’ from Bloomberg in July 2009.
So, it seems the NBER is hedging its bets and splitting the difference here by stating:
In both recessions and expansions, brief reversals in economic activity may occur—a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth. The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction. The most recent example of such a judgment that was less than obvious was in 1980-1982, when the Committee determined that the contraction that began in 1981 was not a continuation of the one that began in 1980, but rather a separate full recession.
But, without wading into the debate on multipliers (you can see my piece on multipliers here), I think we are likely to see long enough a period of stimulus-induced growth to force the dating committee into a late summer 2009 demarcation for the end of the recession. Read my piece on recovery in my recent post Readers of this blog expect the recession to last redux when I said the technical recovery’s start would probably end up being dated Summer 2009. If I had to pick a month, I would go with August which is a month before I had been predicting the recession would end early last year.
The U.S. economy, which I have characterized as in a depression with a small ’d,’ has clearly stopped declining as quickly as it once had done. The maximum rate of decline was December 2008 or January 2009. Now, the economy is still contracting, but at a slower rate. The question is: what now? The general view in the blogosphere is that this is a pause and we will resume our downward path once the true extent of the problems are made manifest. But, is that really true?
I would argue that it is not axiomatic that the structural problems in the U.S. portend a relapse into a deeper contraction. It is just as possible – actually rather likely in my view – that the U.S. economy, at a minimum, will leave recession within the next 6-9 months, if not sooner.
What comes next is debatable at this point. I am expecting double dip – and not necessarily because of a lack of a multiplier.
And, as to the technical, statistical, fake or whatever you call it recovery, you lot are not the only ones who think we aren’t in a recovery. Gallup shows most Americans don’t believe in the recovery.
Question: are the 1970 and 1973-75 recessions or the 1929-33 and 1937-38 recessions double dips as well? I think so. That’s why I spoke of a depression as a “decade is one of sub-par global growth with short business cycles punctuated by fits of recession” in a March 2008 post. In my view, the discussion about multipliers is less relevant. It is the D-process of deleveraging and debt deflation leading to depression which dominates the secular trend. Any credit guy like me will tell you the balance sheet always trumps the income statement.