Thursday, April 03, 2008

What did Bernanke really say about recession?

I finally tracked down the article in The New York Times by Steven Weisman entitled "Fed Chief Sees Possible Contraction in First Half" that does in fact quote Federal Reserve Chairman Bernanke as saying that "a recession is possible." The quote was not from his actual prepared testimony (I even checked the video of that), but probably part of a response during Q&A. As The Times tells us:

"It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly," he said. "We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies."

Later, he said that "a recession is possible," but that "I'm not yet ready to say whether or not the U.S. economy will face such a situation."

That first paragraph properly reflects Bernanke's prepared testimony. The second clearly indicates that Bernanke offered the recession comment at a separate point in the hearing and that he was not forecasting that the economy was likely to slip into a recession.

In a separate article entitled "Bernanke Nods at Possibility of a Recession" the same reporter made the false claim that Bernanke's characterization of  the possibility of a slight contraction somehow was "meeting the technical definition of a recession." That is a nonsensical claim by the reporter. He wrote:

In his bleakest economic assessment to date, the Federal Reserve chairman, Ben S. Bernanke, said Wednesday that the American economy could contract in the first half of 2008, meeting the technical definition of a recession ...

Put simply, the "technical" definition (from NBER) requires a "significant" correction "lasting more than a few months", not merely a "slight" contraction. I suspect that the reporter was confused by the informal definition of a recession as typically being at least two consecutive quarters of declining real GDP growth.

I also suspect that the reporter stretched the simple meaning of a possible contraction in the first half (which might not necessarily last for the entire first half) to a contraction for the entire first half. Granted, there is some ambiguity in Bernanke's statement, but the reporter's interpretation is too much of a stretch and makes it sound as if Bernanke said something he clearly did not say.

Also, note that it is technically possible to have a significant net contraction in the economy for the first half which would not satisfy either the informal or the "official" (technical) NBER definition for a recession. For example, if Q1 comes in at the forecast of 0.2% real GDP growth and Q2 comes in at -1.2% and the second half shows positive growth, the net GDP change for the first half would be negative (-1.0%), but we would not have had a recession by either the informal definition (only one negative quarter when we need two) or the "official" NBER definition (too short a period.) Also note that NBER looks at monthly GDP from firms such as Macroeconomic Advisers, so that it is possible that a negative quarter might have one or two positive months. No matter how you slice it, the reporter's own personal conclusion is not justified either by anything that Bernanke said or by traditional economic theory and interpretations.

-- Jack Krupansky

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