With 22 million jobs lost in the past four weeks, a record drop in retail sales, and huge drops in industrial production and housing starts, it is safe to say we are likely in a recession. Even the Federal Reserve (Fed) in the recent Beige Book said that “economic activity contracted sharply and abruptly.” We highly doubt the Fed would say that if they didn’t believe the economy was in a recession.
Here’s the catch; the National Bureau of Economic Research (NBER) makes the official call on the recession start date, and it might be a while before it is official.
Contrary to popular belief, a recession doesn’t require two consecutive quarters of a decline in real gross domestic product (GDP). The NBER defines a recession as “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.”
According to NBER’s website:
The committee’s procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP and real GDI, but use a range of other indicators as well. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in activity.” Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates. The differences between these two sets of estimates were particularly evident in the recessions of 2001 and 2007-2009.
“If you are looking for a quick call from NBER on when this recession started, don’t hold your breath,” explained LPL Financial Senior Market Strategist Ryan Detrick. “They have taken years to make calls official, as they would rather be accurate than first in economic calls. At the end of the day, we expect this recession will likely be well over before it is officially recognized.”
As shown in the LPL Chart of the Day, official calls for expansions and recessions by NBER have taken years in some cases. In fact, after the economic turning point, it has been nearly a year on average before the call was made official. All of this suggests the NBER should be viewed as a historical keeper of economic data and not looked to for real-time analysis.
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