This column will show that the supposedly non-partisan National Bureau of Economic Research incorrectly pegged the most recent recession’s beginning as December 2007.
The timing of the recession’s inception is no trifle. NBER’s call less than a month after the 2008 presidential election made the breezy, now well-established meme that we should “blame Bush for everything” a fixture in the left’s rhetorical toolbox.
But if the economy really peaked in June of 2008 — and I will demonstrate that it did — that timing would be the noncoincidental point at which it became crystal clear that Barack Obama would turn back Hillary Clinton to become the Democrat Party’s nominee for president, and that he was a strong favorite to defeat Republican nominee John McCain.
NBER claimed in its “determination” that “domestic production and employment are the primary conceptual measures of economic activity.”
The monthly analysis of gross domestic product (GDP) done by Macroeconomic Advisers clearly shows that NBER seriously erred in evaluating its first stated component. Seasonally adjusted monthly output peaked in June 2008, reaching a level which was roughly an annualized 0.5 percent higher than in December 2007:
NBER claimed at the time that “the currently available estimates of quarterly aggregate real domestic production do not speak clearly about the date of a peak in activity.” Oh, but today’s currently available monthly estimates clearly do, and they say that the long-term decline in output didn’t begin until after June. Since NBER pointed to a single month to identify the recession’s starting point, it cannot justify ignoring Macro Advisers’ monthly analyses. (More on that later.)
As to employment, the government’s Household Survey results show that seasonally adjusted employment only dropped by 141,000 during the first four months of 2008, increasing a bit in April, before beginning to steeply decline. Because it estimates the number of self-employed and contract workers, the Household Survey is a more all-inclusive indicator of the number of people working than the Establishment Survey of payroll employment at companies, which fell more sharply during the first half of 2008, and for which NBER has an expressed but unjustifiable preference.
The other factors NBER cited mostly refute the idea that the economy’s peak was December 2007:
- “Our measure of real personal income less transfers peaked in December 2007, displayed a zig-zag pattern from then until June 2008 at levels slightly below the December 2007 peak, and has generally declined since June.”
- “Real manufacturing and wholesale-retail trade sales reached a well-defined peak in June 2008.” (How much more of an obvious admission that “we’re wrong, but we don’t care” can there be?)
- “The Federal Reserve Board’s index of industrial production … (which) excludes all services and government … peaked in January 2008, fell through May 2008, rose slightly in June and July, and then fell substantially from July to September.”
I’ll add one factor on top of that: There were year-over-year increases in monthly federal tax collections during the first seven months of 2008, including what was then a single-month record $407 billion collected in April. Many of those who made quarterly estimated income tax payments in April and to a lesser extent June were doing so on optimistic assessments that 2008 would work out to be about as good a year as 2007.
If it was going to be consistent in downplaying positive real economic growth while giving great weight to job losses as it obviously did in claiming the nation was in recession during the first half of 2008, NBER should have extended the recession’s end to September 2009.
During that year’s third quarter, the economy lost almost 1.3 million Household Survey jobs and 794,000 Establishment Survey jobs — more than was lost in either survey during the first half of 2008. Yet NBER declared the recession over primarily because of mild annualized GDP growth of 1.4 percent (after all revisions to date); Macro Advisers’ analysis shows only a 0.5 percent improvement from June to September 2009.
As I predicted in October 2009, “[I]f the NBER does decide that the third quarter wasn’t recessionary, it will be the first time it has done so during a period of so much quarterly job loss, even after adjusting for workforce size.” And that’s what it did.
But it gets better — actually worse, if you’re naive enough to believe that NBER is some hallowed organization which looks at these matters with perfect objectivity.
In justifying pegging the recession’s end at June 2009, NBER wrote (bolds are mine throughout the rest of this column):
… the committee refers to a variety of monthly indicators to choose the months of peaks and troughs. It places particular emphasis on measures that refer to the total economy rather than to particular sectors. These include a measure of monthly GDP that has been developed by the private forecasting firm Macroeconomic Advisers …
Contrast this statement with how the group said it handled determining the recession’s beginning:
In its deliberations, the committee relied on a number of monthly and quarterly economic indicators published by government agencies.
There is no mention of private firms whatsoever.
Grasp the significance of this. NBER appears to have totally disregarded Macro Advisers’ monthly GDP measurements when it pegged the start of the recession, but placed “particular emphasis” on monthly indicators like those from Macro Advisers in determining its end.
And it gets even worse.
In deciding that the previous recession ended in November 2001, NBER wrote that “the committee also looks at estimates of monthly real GDP prepared by Macroeconomic Advisers.” Additionally, in assigning that recession’s March 2001 beginning, it wrote:
The traditional role of the committee is to maintain a monthly chronology, so the committee refers almost exclusively to monthly indicators. The committee gives relatively little weight to real GDP because it is only measured quarterly and it is subject to continuing, large revisions.
Although Macro Advisers isn’t specifically named, the firm has been doing monthly GDP estimates since 1992.
Summed up succinctly: NBER appears to have ignored monthly GDP — something it has stated several times is a desirable data point to review — only one time in its past four business cycle evaluations of the economy. That was in determining when the most recent recession began. Primarily because it chose to rely only on quarterly data it had previously characterized as deserving “little weight,” it blew the call.
If NBER had properly applied its own criteria, it would have concluded that the economy reached its previous-decade peak in June of 2008.
I questioned NBER’s call when it was first announced. I’ve stood by that assesment several times since (here, here, here, and here), even though the data has gravitated in NBER’s direction a bit — but not nearly enough — during the intervening years. I’m more convinced than ever that NBER was and remains wrong, and that yours truly has been and remains right.
The beginning of the recession thus directly ties to the perfectly predictable “batten down the hatches” reactions of enough businesspeople, investors and entrepreneurs to matter to the energy-starving, heavy-taxing, wealth-redistributing, business-hostile agenda in Obama’s mid-2008 speeches and his party’s platform.
As I see it, NBER, regardless of its alleged stated “nonpartisan” nature and regardless of the fact that a few of its leaders might be considered center-right economists, has little if any defense against a charge that in determining that the recession began in December 2007, it acted no differently than a bunch of left wing-coopted tools.
In doing so, it has provided priceless assistance to Barack Obama, and has enabled all but those who understand and closely follow business and the economy with an open mind to avoid seeing what should have been obvious. I documented that point when I declared the POR economy’s beginning in early July 2008, and rephrased it nine months later:
… businesspeople, entrepreneurs, and investors … deliberately downsized in response to stated promises by powerful government officials Pelosi, Obama, and Reid to penalize and punish them and the economy as a whole, if and when they gained power.
After two years of having the terrible triumvirate of House Speaker Nancy Pelosi, Obama, and Senate Majority Leader Harry Reid in power followed by another 2-1/2 during which Obama and Reid have done everything possible to prevent a return to economic and fiscal sanity, economic conditions remain decidedly worse in too many areas to mention. Five years after the recession really began, we still have the POR economy, and the shackles it has placed on the economy’s producers have become more crippling than ever.
NBER’s blown call demonstrates why we shouldn’t leave the determination of when a recession begins or ends in the hands of mistake-prone and all too often agenda-driven academics. The layman’s definition — “a decline in GDP for two or more consecutive quarters” — is easy to understand and, more importantly, not subject to manipulation.