The National Bureau of Economic Research (NBER) business cycle dating committee, the arbiter of US recession / expansion chronology, stated in June that a peak in monthly economic activity had occurred in February 2020, implying the start of a recession. This determination was premature and unwise. Monthly data indicate that the “recession” ended in April, implying that it was the shortest in history by a significant margin and did not fulfil the NBER’s traditional duration requirement.
The issue is not merely semantic. The recession determination is likely to have influenced investor behaviour, causing some market participants to reduce exposure to economy-sensitive assets and thereby suffer a significant opportunity cost from the V rebound in markets.
According to the NBER’s traditional definition, “a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months”. The duration requirement captures the self-feeding nature of recessions, in which an initial negative impulse is magnified and extended by multiplier / accelerator effects.
There was no such internal development in the recent output contraction, which was caused solely by a government decision to place controls on economic activity for health reasons and reversed when these were relaxed. The brevity of the restrictions coupled with government / central bank support for business and consumer cash flows weakened second-round effects.
The NBER’s monthly assessment places particular emphasis on two indicators: real personal income excluding transfer payments and payroll employment. Both bottomed in April and recovered significantly through July.
The Conference Board’s coincident economic index comprises the above two indicators along with industrial output and real business sales. The index fell by 13.6% from a February peak to an April low but rose by 6.7% between April and July.
The NBER, it seems, will be forced to concede that the “recession” ended in April, implying that it has already been exceeded in duration by the new “expansion” phase.
The NBER’s recession chronology extends back to 1854. A two-month recession would be the shortest in history by a significant margin – the previous minimum was six months, i.e. January-July 1980. The latter recession, similarly, reflected government action – the imposition of credit controls – and ended when these were removed.
The 1980 recession was followed by another deeper and longer contraction starting 12 months later in July 1981. It has been suggested that labour market and credit damage from the covid shock will result in a similar “double dip” in late 2020 / early 2021. The 1981-82 recession, however, was caused by Fed Chair Volcker’s assault on double-digit inflation – the Fed funds rate rocketed from 11% to 19% between August 1980 and May 1981. Monetary policy will remain super-loose for the foreseeable future, although fiscal policy could tighten significantly next year.
The current NBER committee has attempted to justify its disregard of the duration requirement, arguing that “the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions”. It is doubtful whether previous distinguished committee members who instituted the “depth, diffusion and duration” necessary conditions would have agreed with this shifting of the goalposts.
The recession determination may be feeding into investor expectations of a “normal” economic recovery in which capacity remains underutilised and inflationary pressures weak for a prolonged period. The forecast here is that an ongoing V rebound in activity will develop into a full-scale boom in 2021, resulting in supply-side bottlenecks, commodity price strength and a surprisingly rapid reversal of employment losses.