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Monday, April 12, 2010

NBER Recession Dating Committee "Wary of Certifying an Upturn"

Despite recent statements by some NBER Recession Dating Committee members, the Committee is not ready to declare the recession over just yet:

Recession Arbiters, Wary of Certifying an Upturn, by Sewell Chan and Louise Story, NY Times: For the record, this recession isn't over yet.
A committee of economists, charged with determining the official turning points in the nation's business cycles, certifies the beginnings and ends of recessions. But this time, the committee members say, the evidence is not so easy to decipher.
The committee plans to announce on Monday that it cannot yet declare an end to the recession that began in December 2007... Such an acknowledgment is rare in the history of setting dates to business cycles and could affect the behavior of investors and consumers.
Despite a recent uptick in employment and income, the decision ... reflects a lingering worry that the economy could turn downward again in a so-called double-dip recession.
Several economists on the committee, which has seven active members, said they considered such a turn to be unlikely. But, they said, the duration and severity of the contraction have made it hard to determine with authority that a recovery has begun. ...
Ben S. Bernanke, the Federal Reserve chairman, and Christina D. Romer, the chairwoman of the White House Council of Economic Advisers, are former members of the committee, and its position could potentially affect their outlook on monetary and fiscal policy.
The two previous recessions, in 1990-91 and in 2001, each lasted eight months and were mild enough that the committee felt confident in pronouncing them over in a year or less. As it was, the current recession was 11 months old before the committee announced its start date.
Now, the committee, which is part of the National Bureau of Economic Research, a nonprofit group, says that the timing of an upward turn has been harder to discern than in the past. Moreover, the government has revised several statistics after they were initially released, making it more difficult to say when the economy hit bottom. ...
In interviews, several committee members carefully chose their words. Citing job gains in March, Mr. Frankel, an economist at the Harvard Kennedy School, declared on his blog last week, "The recession is over." ... Another committee member, Robert E. Hall of Stanford, said, "The odds favor the view that a true expansion has begun and that the recession beginning in 2007 is over."
But he added that "one cannot totally rule out the unlikely possibility that the economy might resume contraction again soon." ...
A third committee member, James H. Stock, a Harvard economist, has also been associated with the belief that the recession ended last year. On Sunday, Mr. Stock would not describe the discussion.
But he said: "It's incumbent on the N.B.E.R. to maintain its decades-long tradition of care in the detailed assessment of the date of turning points. That is a far more difficult task than I think many commentators understand."
A fourth committee member, Martin S. Feldstein, also of Harvard, warned in January of the risk of a double-dip recession. ...
Mr. Frankel and Mr. Hall have been quoted as saying that the recession has ended. In the Internet era, those comments generated more buzz than the bureau is accustomed to. Asked why the committee would not just wait, several members cited the public interest and a desire for transparency.
James M. Poterba of M.I.T., who is the president of the national bureau and a committee member, also would not tip his hand. ...

The committee, created in 1978, has assigned the start and end dates of economic contractions for every business cycle since 1854. It has long emphasized that it looks only backward, and does not make forecasts or predictions.

I am still deciding whether individual committee members ought to be speaking on their own outside of official NBER declarations on this matter. But generally more information is better than less, and I don't mind monetary policymakers giving their views prior to official meetings, so why the difference here? Why would I even think about objecting?

It's not the statements themselves, it's how they are used. The Fed is a policymaking body, and hence FOMC Committee member statements bear directly on policy matters. NBER recession dates, on the other hand, are not intended as policy statements or to be used to set policy in real time. These dates are mainly for researchers -- it gives us all a common set of recession dates to use in our work -- and it's important that those measures be consistent over time for that reason (though I would like to see an alternative measure developed and applied backward, one that puts more weight on employment rather than output recessions). The recession dates are developed ex-post, far after events are over to give the Committee the information it needs to get the call right. You don't want, for example, data revisions down the road to alter the dates. If the committee wants to try to make their measure more relevant in real time, something they seem to be moving toward, they should do so and say so, but right now it's still mostly a retrospective examination to be used by researchers, not policymakers.

I would have no problem at all with Committee members saying whatever they want outside of the official communications if this was made clear. But right now, policymakers in Congress and the public more generally view the Committee's communications as the official call in real time, and that can lead to bad policy. For example, the article above says "its position could potentially affect [policymakers'] outlook on monetary and fiscal policy." However, if policymakers wait for the Committee to, say, call a recession before instituting stabilization measures, it will be too late. The NBER does add qualifiers along these lines to its statements, but there is still confusion and the Committee needs to make very clear exactly what it thinks its job is, and how the information it gives out should be used.

    Posted by on Monday, April 12, 2010 at 11:07 AM in Economics | Permalink  Comments (14)


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