NBER Announces that Jan. 2008 was the First Declining Month in the Recession.

The NBER (National Bureau of Economic Research) has declared an official recession that started with January 2008's decline.

Some of the press has been incorrectly reporting that, according to the NBER, the recession is now over a year old.

This is a misunderstanding of how the NBER reports, in part fueled by the NBER’s own ambiguous language. The NBER just announced that December 2007 was the peak month, an economic expansion month, while January 2008 was the first declining month of the current recession. They in effect concluded that the economy in December 2007 was not in recession, but was expanding.

A LOOK BACK TO 11 MONTHS AGO

On January 4, 2008, I analyzed employment data and wrote that “we are probably already in a general recession (or will be in one by August at the latest),” and that “I would put the chances of a recession in 2008 at perhaps 75-90%.”

I was more cautious in my wording than I felt because my view was at odds with 98% of top money managers at the time:

If the past is any guide to the future--and anyone doing backtesting knows that it often isn’t--then we are probably already in a general recession (or will be in one by August at the latest).

This conclusion is consistent with some work I did last summer showing that since World War II, substantial housing declines always preceded or coincided with recessions: Since World War II, there have been three sharp housing price declines (in real dollars):

the 1947-48 housing price drop, preceding the Nov. 1948 – Oct. 1949 recession,

the 1979-82 housing price drop, preceding the July 1981 – Nov. 1982 recession (and also coincident with the Jan.-July 1980 recession), and

the 1989-91 drop, associated with the July 1990 - March 1991 recession.

Caveats:

1. A recent survey of top money managers, CNBC’s Trillion Dollar Survey, found that 98% of the 60 experts surveyed put the chances of a recession in 2008 at 50-50 or less. As someone with far less expertise than they, I would put the chances of a recession in 2008 at perhaps 75-90%. While (social) science does not work by consensus, a wise person should probably give more weight to the opinions of 59 of the 60 experts than to my opinion (shared by only one of the 60 experts surveyed by CNBC.

Here is part of this week's NBER news release announcing the recession:

The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, November 28. The committee maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions. The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then.

From the somewhat ambiguous NBER language, you can see why some reporters seemed to interpret December 2007 as the first down month, rather than the last up month in a 73-month economic expansion that peaked in December 2007.