The independent National Bureau of Economic Research is the official arbiter of economic downturns. But it takes its time
Editor's note: This is the first in a series of stories that will look at how the economic downturn is affecting individuals throughout the country.
PALO ALTO, CALIF. Robert E. Hall doesn't make predictions, at least not about the state of the economy. Hall is the Stanford University economist who chairs the committee charged with identifying when recessions begin and end. Over lunch at a sunny café on the school's Mediterranean-style campus in Palo Alto, Calif., he explains it's much too early to determine whether the current slump merits the "R" word. "All the members of the committee agree we're far from a decision point," he says. Until much more evidence comes in, he prefers to call this an "experience."
It certainly is an experience for most Americans. Home prices tumble month after month. Food prices surge. Gas prices are approaching $4 a gallon. And the job market is getting rough. Given the evidence they see with their own eyes, most Americans believe the downturn is plenty clear. A recent survey by CNN (TWX) and polling firm Opinion Research found that 4 in 5 people think the economy is already in recession.
But the recession won't be official until Hall and his colleagues at the National Bureau of Economic Research say so. The NBER has been the recognized authority on dating downturns since 1961, when the U.S. Commerce Dept. began including the bureau's business cycle data in government publications. Today the NBER's business cycle dating committee has seven members, including Hall and Harvard economics professor and NBER President Martin Feldstein. The NBER is a nonprofit research group that operates independent of the government.
Ivory Tower Pace
Many people think the definition of a recession is two consecutive quarters of decline in the gross domestic product. But that's a misperception. Hall and his colleagues will look beyond such simple metrics, weighing monthly GDP estimates, employment data, income, industrial production, and other factors. To call a recession, they'll look for clear signs of "a significant decline in economic activity spread across the economy, lasting more than a few months."
Any call, if it comes, is going to take a while. The NBER usually takes 6 to 18 months to decide when a recession starts or ends. Hall's committee didn't announce the end of the 2001 recession until a full 20 months after the fact.
Should they move faster? Some critics think so. This measured, academic approach is in sharp contrast to the daily lives of most Americans. While Hall and his colleagues pore over spreadsheets and statistics, most people see the economy's troubles every day, in the cost of a tank of gas, the drop in home prices, or the layoffs of a friend, neighbor, or spouse.
Members of the business cycle dating committee hail from prestigious academic institutions, from Stanford to Northwestern to Harvard. Their worlds are well-insulated from the worst of the economic troubles. On such exclusive campuses, there aren't homes foreclosed, businesses shuttered, or people homeless.
Waiting for Reliable Data
Hall has heard all of the questions before. He's 64 and has chaired the dating committee since it was formed in 1978. After lunch, as a soft breeze tousles his gray hair and the midday sun glints off his metal-frame glasses, he explains there are good reasons for his group's deliberate pace. First, the committee exists to identify periods of economic expansion and contraction for the historical record, not to comment on them while they're taking place. They're also not involved in policymaking, so whether they call a recession or not has nothing to do with the actions Washington may take to address problems in housing or gas prices.
More immediately, sure signs of a recession, as Hall's committee defines it, aren't yet evident in the government's official economic data. Yes, Wall Street firms like Merrill Lynch (MER) and Citigroup (C) have written off billions, and Main Street is struggling with housing and gas problems. But the distress hasn't translated into declining GDP.
Government figures show the economy expanded by 0.6% in each of the last two quarters. The first-quarter GDP data announced at the end of April are preliminary and are likely to be revised, which means it's possible they could turn into negative territory. Waiting for reliable data is one of the main reasons it can take so long to identify a recession's beginning and end.
Hall and his colleagues have plenty of experience in the field. Since the business cycle dating committee was established, they've called four U.S. recessions. The longest ran from July, 1981, until November, 1982. The highest unemployment rate during any of the four downturns came during the one a quarter-century ago, when the rate hit 10.8%. The country is far from that level now, with unemployment at 5.0% in April, according to the federal government's Bureau of Labor Statistics.
No Definitive Consensus
Hall says he's a hands-off manager of the process of identifying recessions. "These aren't people who can be directed," says Hall of the committee members. "These are people with a lot of expertise and awareness of what's happened in the past, but it's not a group that has a lot of disagreement." Discussion takes place by e-mail and frequently revolves around a mid-month message Hall sends to committee members containing economic data, including the monthly estimate of GDP growth, as calculated by the St. Louis consulting firm Macroeconomic Advisers.
The committee's other members aren't as reluctant as Hall to discuss whether a recession is here, and parsing all this data has led them to take differing stances on that point. Feldstein wrote in an opinion piece in the Financial Times last week that the reported growth of 0.6% in GDP during the first quarter was "very misleading" and that monthly data indicate the economy has shrunk since the beginning of 2008. Meanwhile, Edward Lazear, an NBER member on leave from the organization while he chairs the White House's Council of Economic Advisers, told a meeting of Wall Street Journal journalists that "the data are pretty clear we're not in a recession."
Hall chooses not to wade into the debate because "the chairman of a group like this ought to be more neutral," he says. The committee's members share a broad consensus about the economic conditions that constitute a recession, he says, and even if they disagree today about whether one is here or will soon arrive, they'll be able to agree when all the data is in.
"Both positions are tenable given the uncertainty," says Hall. "Wait for a bit and all will come into focus."