Is the Recession Over?

Fed Chair Bernanke tells us that the recession is probably over.  Business Week reports:

From a technical perspective, the recession is very likely over at this point,” Bernanke said in responding to questions at the Brookings Institution. “It’s still going to feel like a very weak economy for some time because many people will still find that their job security and their employment status is not what they wish it was.”

The announcement marks the start of a new “silly season” where people argue about recession dating, and misconstrue statements, taking them out of context.

Here is the issue.

The public goes by the “feel” method, using plenty of anecdotal evidence.  If there are many people feeling the pain from an economy growing below trend, it feels like a recession.  We really sympathize with this practical approach.  It is important to achieve potential.  The economy has been below the potential growth path for years, and will probably not get back there, achieving full employment, for years to come.

This is the cost of the credit collapse.

The media combines anecdotes with the “two quarters” rule.  Two quarter of negative GDP signal a recession.  It is not clear what constitutes a recovery.

The economists take a very different and more complex approach.  Read carefully.  If and only if there is a big decline on various indicators, the recession has been established.  At that point, and only at that point, the NBER committee looks back and finds a peak.  That peak is then designated as the start of the recession.

There is a good reason for this approach.  Economists want to link the actual recession timing to other economic data.  They are not trying to give a real-time signal.  It is all about timing for economic research.


The media and the big-time blogs have a field day with the economists’ definition.  They play upon the popular conception, portraying economists as clueless bozos, who cannot see a recession when it is obvious to all.  This is great fun and gets many boo-yah’s from the readership.

We did a careful description of this process in April, 2008, How to Win a Recession-Predicting Contest.

In that article we successfully guessed the actual start of the recession.  We urge readers to take a look at that article.   More importantly, we wrote as follows:

It Really Does not Matter

There is no light switch that makes things terrible if the economy
is in a recession and acceptable if it is not.  Economic data show that
we are experiencing a period of economic weakness.  This means lost
jobs and lost profits.  It is a permanent loss and painful to many.
This is true whether or not the economic weakness attains status as an
“official” recession.  It is a range of results, not a black or white

Now for the Flip Side

We are now entering the “flip side” of this story.  If the economic rebound continues, the dating committee will go back to determine the trough.  It will probably be some time in the last few months.  We will not know the official answer for many more months.

Investment Conclusion

There are some who are very negative on the economy right now.  If it turns out that the recession actually ended last spring, it does not mean that these analysts were foolish.  Similarly, going back to 2008, those who did not predict the recession might have been right.

The key point?  The Lehman failure and the instant freeze of credit markets created the downturn that verified the recession, moving the date back to the prior peak.

It is a cheap shot to take issue with those who did not foresee Lehman and the consequences, just as it will be a cheap shot to criticize those who are not currently predicting the recession end.

Big economic events provide the trigger for a post-dated result.  For investors, it matters little.  It is wise to ignore the “silly season” and focus on the fundamentals of interest rates and expected earnings for stocks, both of which are now becoming much more positive.

A Final Thought

We have frequently cited the ECRI as a source for economic cycles in real time.  Many predicted a recession for years before it occurred.  Since there is a recession every five years or so, this is a broken clock method.  The ECRI made the call in real time.

What about now?  The ECRI leading indicators have been very strong since July.  Most pundits are skeptical, thinking that they have deeper insights.  We shall see.

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