Who "Certifies" a Recession?

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April 16 2001 2:20 PM

Who "Certifies" a Recession?

Everyone agrees the economy is shaky, but no one knows how shaky. Hopeful analysts point out that no one has formally certified a recession (e.g., this recent New York Times article). Who certifies a recession, and what exactly does this mean?

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By general agreement, the job falls to a group of prominent economists affiliated with a nonprofit research center called the National Bureau of Economic Research (NBER--pronounced "en-burr" or "the bureau"). The bureau deputizes a "Business Cycle Dating Committee" to identify the exact month that recessions begin and end.

A recession is a period when the economy contracts in size, meaning that U.S. workers produce fewer goods and services. Many economists apply the label only when the contraction lasts for six or more months. The bureau prefers a fuzzier definition:

A recession is a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy.

Practically speaking, the bureau measures economic health by looking at two monthly indices: industrial production and employment. Sometimes these indicators move in different directions, and it's a tough call; other indicators, like inflation-adjusted personal income, may come into play. But mostly they move in the same direction, and it's just a matter of reading publicly available data.

So what's to argue about? Well, the trick is that you can't certify a recession until it's been under way for a while. That is, only in hindsight can we know whether spring 2001 was the beginning of a recession or simply a blip that fell short of full-blown recession-hood. For instance, the last recession began in July 1990--yet was not certified by NBER until April 25, 1991, nine months later. Thus, there's plenty of room for reading tea leaves.

But so what? A semantic argument among academic economists seems pretty far removed from what seems truly important--the actual number of layoffs, the decreases in production, and so forth. These real economic variables, of course, are ultimately what matters, but the widespread use of "recession" actually can become a self-fulfilling prophecy in the way that John Maynard Keynes described.

That is, sophisticated corporations make production and employment decisions based on the same raw economic data that NBER uses to name a recession. Thus, only changes in these data--and not an NBER press release--are likely to affect their behavior. But economic decisions by small businesses and consumers are typically affected by a general sense of the economy's health that can be unrelated to specific indices. If they hear "recession," they may choose to postpone spending, which reduces sales for other companies, who may also postpone spending or lay off employees, and so forth.

Thus, maybe it's a good thing that NBER takes so long. By the time they get around to certifying a recession, we may be on our way out of one. For example, the last recession officially ended in March 1991--one month before NBER announced that the recession had in fact begun.

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