Economists who make the recession call

An arcane body called the National Bureau of Economic Research is in charge of deciding when America is officially in recession. Its time may have come
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The Independent Online

Will there be a recession in the US? Right now, everyone seems to have an opinion, everyone is furiously debating the question.But only one organisation will have the answer. That organisation is the National Bureau of Economic Research.

Whereas in the UK, the Treasury can flex Gordon Brown's 10-year-old golden rules by redefining the beginning and end of the business cycle at will, the dusty-sounding but uber-influential NBER has been arbiter of the US business cycle for nigh on 90 years. Only when the NBER raises its red flag will the US officially be in a recession; only when its green flag goes up can we be sure we are once again in the clear.

And that suits just fine, since no one questions the organisation's credibility or its integrity, built up since its foundation in 1920 and burnished by alumni that include 16 of America's Nobel prize-winning economists. It exists because it needs to: in 1920, there was too little understanding of the dynamics of the business cycle and an urgent need for data on long-term economic trends. Without it, the bureau's founding economists feared, economic policy was driving in the dark without headlights. Before the work done by its earliest associates, no one agreed even on how to measure economic activity. Milton Friedman's NBER-funded research on the determinants of consumer spending was also hugely important to turning economics into a science dismal though it may be said to be.

"While the founders of the bureau differed strongly among themselves on what economic policy should be, they all believed that whenever possible, social programs should rest on objective knowledge of fact and not on subjective impressions," Simon Fabricant wrote in his history of the NBER.

Unsurprisingly, its staff have repeatedly been approached to advise the US presidents, and no fewer than seven including Ben Bernanke, now leading the Federal Reserve have served as chairman of the President's council of economic advisers.

Yet the NBER remains private, above the government fray. It is run on a not-for-profit basis. It is studiously non-partisan. And most important of all, it doesn't advocate any particular monetary or fiscal policies. Its current chief executive, the Harvard University professor and one-time Ronald Reagan adviser Martin Feldstein, may be shouting from the rafters that the US needs big interest rate cuts and a tax cut to avert recession, but he is not doing it in publications funded by the NBER. The bureau itself just sits, and waits. It will make its declaration in due course.

In the UK, a recession is defined as two consecutive quarters of negative economic growth, as measured by the Government's GDP figures. If the UK rules were adopted, the US would have formally avoided recession in the aftermath of the dot.com bubble and the 9/11 terror attacks. In the end the NEBR declared a shallow contraction. The NBER's definition is more nebulous, taking into account a range of underlying economic indicators that are calculated monthly, and downplaying GDP because it is so often subject to revision and is only calculated quarterly.

According to the NBER, a recession is "a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade". Those are the four measures it will be examining forensically as 2008 progresses, and it puts employment data at the top of its list of influences since it is the broadest monthly indicator.

So last Friday's miserable unemployment figures will feed prominently into the discussions of the NBER committee that arbitrates on the business cycle. A second month of a rising unemployment rate, which has now hit 5 per cent of the workforce, could trigger that part of the NBER's definition of recession, according to Kevin Logan, chief US economist at Dresdner Kleinwort.

"They have the official call," said Mr Logan, "but the odds have increased and people are talking about a recession now being likely, not just possible. Private employment declined in December and industrial production may be down shortly. Currently, business sales and real incomes are still expanding, but the jump in the unemployment rate is ominous.

"If business becomes more cautious because it senses slower growth in demand, or because of the higher costs of energy, or because of a restriction in credit growth then we could be drifting in the direction of a recession."

It takes the NBER several months to determine exactly when a recession begins and ends. November 2001, the last time the organisation proclaimed a recession, was the same month that it turned out to have ended. The organisation is particularly wary of false starts and false dawns, saying it waits to be sure all its measures of economic activity complement each other. "A recession involves a substantial decline in output and employment," it says. "In the past six recessions, industrial production fell by an average of 4.6 per cent and employment by 1.1 per cent. The bureau waits until the data show whether or not a decline is large enough to qualify as a recession before declaring that a turning point in the economy is a true peak marking the onset of a recession."

None of which stops Mr Feldstein from making his personal predictions, urging the Fed to cut rates further, and demanding Congress passes a package of measures to stimulate the economy. An editorial piece he penned for The Wall Street Journal last month is typical of his increasingly gloomy prognosis. "Because of current credit market conditions, there is a risk that interest rate cuts will not be as effective in stimulating the economy as they were in the past. The current credit crunch reflects not only a lack of liquidity, but also a lack of confidence in the creditworthiness of counterparties and in the accuracy of asset prices. This problem is now being compounded by the banks' loss of capital as they recognise past losses. In my judgement, the probability of a recession in 2008 has now reached 50 per cent. If it occurs, it could be deeper and longer than the recessions of the recent past."

As and when the NBER raises its doomy red flag, its chief executive will be able to say: told you so.

Measuring economic misery

* If the US economy falls into a recession this year, it will be the 33rd contraction in the past 150 years, the NBER has determined, and the 17th since the body was founded in 1920.

* Recessions are getting fewer and further between. The last downturn in 2001 came at the end of exactly a decade of economic expansion, the longest period of unbroken growth measured by the NBER, which was the result of the productivity improvements and benign inflation of the Nineties.

* Recessions are also getting shorter. The 1990-1991 contraction lasted just eight months, as did the downturn of 2001 that resulted from the bursting of the dot.com bubble.

* Despite dating the last recession to March 2001, the NEBR said that the terror attacks of 9/11 that year were a possible cause. "Before the attacks, it is possible that the decline in the economy would have been too mild to qualify as a recession. The attacks clearly deepened the contraction."

* The NEBR records the Great Depression as having begun in August 1929, ending in March 1933. That is a total of 43 months, the worst downturn of the 20th century, but not as bad as the 65-month slump identified by NEBR historians between 1873 and 1879, after economic problems in Europe caused the collapse of America's largest bank.

* In the mid-Seventies recession, economic stagnation was combined with high inflation after a quadrupling of oil prices. The NEBR measures it at 16 months, from November 1973, the longest since the Great Depression.

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