When Does a Recession End? It's Not Just an Academic Debate
The NBER typically takes more than a year to date the peaks and troughs of business cycles because it relies exclusively on historical data, which is subject to wide revisions. But NBER member Jeffrey Frankel, who teaches at Harvard's Kennedy School of Government, made what might be seen as a mistake in decorum by blogging that he thought the recession was over. However, Frankel added in an interview with The New York Times that he could see a good argument for delaying the NBER's official announcement.
Worth keeping in mind is that the NBER isn't immune from politics. While I'm not saying political leanings affect the NBER's calculations, I would be surprised if such leanings were completely excluded from its thinking.
Jobs Are the Key
In that light, note that Frankel has worked as an adviser to Treasury Secretary Timothy C. Geithner and served on former President Bill Clinton's Council of Economic Advisers. But not all NBER members are Democrats. A Republican NBER member, Harvard's Martin Feldstein, who was head of Ronald Reagan's Council of Economic Advisers, told the Times that there's a significant risk that "the economy could run out of steam some time in 2010."
All this professorial gnashing of teeth may seem purely academic, but it raises an important question: What is a recession? As I posted last July, the NBER uses many factors to answer this question, and the primary one is job destruction, not the widely believed two consecutive quarters of GDP contraction.
Based on that, the NBER wisely, in my view, declared the recession's start in December 2007 because of job losses, and it should use job creation as the measure of the recession's end. March's employment report showed 162,000 new jobs -- but the NBER should wait for a few more months' worth of positive job news before officially saying the recession is over.
Influencing Which Way the Winds Blow
Not surprisingly, the debate about when the recession ends has wider ramifications. That's because Washington is engaged in a political debate about whether the U.S. should further boost the federal budget deficit by passing another economic stimulus package -- amounting to $150 billion in tax credits for businesses and individuals.
If the NBER decides that the recession is over, those who favor such a jobs-creating stimulus bill are going to have the wind taken out of their sails, making it even more difficult to get political support for such spending. However, if the NBER decides to wait long enough to declare the end of the recession, based on the cautious outlook of NBER members such as Feldstein, the jobs bill could get the support it needs.
And if that bill passes and helps create even more jobs, Feldstein could wind up helping the Democratic party as the November elections approach.