Sunday, October 4, 2009

Is the Recession Over - Revision 1

Is the recession over?
To evaluate the validity of the assertion that “the recession is over” requires a common agreement at to what economic conditions identify the boundaries of recession. In economics, a recession is a general slowdown in economic activity over a period of time. You would expect to see declines in areas such as production (as measured by Gross Domestic Product or GDP), employment, investment spending, capacity utilization, household incomes, and business profits during recessions.

In a 1975 New York Times article, economic statistician Julius Shiskin suggested "two quarters of negative GDP growth" as a rule of the thumb for identifying the beginning of a recession. He also suggested that “two quarters of positive GDP growth" signaled the ending of a recession.

In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. It is used almost universally by academics, economists, policy makers, and businesses to identify the precise dating of a recession's beginning and end.

NBER information released September 29 indicates that we have experienced four consecutive quarters of negative growth, and although the 2nd quarter 2009 was estimated at a .8 decline we still have not met the criteria for recovery.

Beginning of the end?
Advance 3rd quarter 2009 GDP figures won’t be released by the NBER until October 29 at 8:30 AM, and are subject to revision. If the quarter shows positive GDP growth, it could indicate the beginning of the recession’s end. The best possible outcome would be the recession would end 4th quarter of 2009 if the positive GDP growth continued in the 4th quarter.

Confusing the economic picture is the fact that business profits have not generally declined. They have been buoyed by aggressive cost cutting, particularly in labor costs. Profits have continued a general upward trend despite falling revenues. This has contributed to the stock market recovery.

Despite that fact that business profits are up, the assertion that “the recession is over” is premature. The criterion for economic recovery requires that two consecutive quarters of positive GDP growth will signal the end of a recession. So far, there has been no GDP growth reported.
In choosing the dates of business-cycle turning points, the committee follows standard procedures to assure continuity in the chronology. Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee views real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, the committee therefore places considerable weight on the estimates of real GDP issued by the Bureau of Economic Analysis of the U.S. Department of Commerce. The traditional role of the committee is to maintain a monthly chronology, however, and the BEA's real GDP estimates are only available quarterly. For this reason, the committee refers to a variety of monthly indicators to determine the months of peaks and troughs.

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, the committee refers to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. The committee also looks at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

In addition to GDP growth, the NBER looks at four variables in making recession calls: real personal income less transfer payments; real manufacturing and wholesale-retail trade sales; industrial production; and payroll employment.

I do not necessary agree since two thirds of the economy is based on retail spending. Also remember it take 2 quarters of negative growth to indicate a recession but one quarter to say we are out. Please read the article below I wait until I see how the consumer spend over the Holidays but I would agree that by the end of 2nd quarter 2010 we should be on our way.

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