Thursday, April 03, 2008

The recession in 2001

Since people are chattering a lot about recession, I thought it would be instructive to go back and get the specifics of the last recession, in 2001.

The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is the "official" arbiter for establishing the start and end dates for recessions. Although many people informally define a recession as two consecutive quarters of negative real GDP growth, NBER uses a more thorough analysis that does incorporate GDP data, but broken down to a monthly level. NBER also, uses real income, industrial production, and payroll employment, and wholesale-retail sales.

The NBER definition for a recession is:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

NBER determined that the recession in 2001 started when economic activity hit a "peak" in March 2001 and ended when economic activity hit a "trough" or bottom in November 2001, a period of 8 months.

Incidentally, if you use the informal two-quarter rule you would conclude that there was no recession in 2001 since there was a positive quarter between the two negative quarters.

Real GDP first went negative back for Q3 of 2000 (-0.5%), but then went positive for Q4 (+2.1%). That negative quarter was clearly part of a slowdown and was a contraction, but was not part of the subsequent recession.

Real GDP went negative again for Q1 of 2001 (-0.5), then positive in Q2 (+1.2), and then negative again for Q3 of 2001 (-1.4%).

The U.S. economy was in recession for almost three quarters, but we only had two non-consecutive quarters of GDP contraction.

Finally, please note that the GDP number for any quarter is released three times before it is "final" (advance estimate, preliminary revised estimate, and then final estimate revision) and even then could be revised for the annual revision, so GDP for a quarter could bounce between positive and negative several times before we get a clear read for the quarter. This is why NBER tends to wait for six to 18 months before "calling" the start and end dates for a recession.

-- Jack Krupansky

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