Monday, September 20, 2010

The Recession Officially Ends

Newsweek Magazine/The Street article "The Recession Officially Ends" (September 20th, 2010) struggles with even marginally objective journalism. Throughout an article discussing the decision by the National Bureau of Economic Research (NBER) that the recession had ended in June 2009, it can't help itself but snipe, repeatedly. Newsweek, doing its best to imitate Pravda, would doubtless desire the reformation of the Tsentralniy Komitet Kommunistitcheskoi Partii Sovetskogo Soyuza, the Soviet Central Committee, to make centralized decisions concerning recessions.
The recession isn't just over, it actually ended in June 2009, according to a statement made Monday by the elite, ivory tower cadre of U.S. economists known as the National Bureau of Economic Research (NBER).


In its typically obtuse economist language, NBER noted in calling a June 2009 end to the recession that in "determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month."


To support their claim that the recession ended over a year ago, while for many Americans there has been little indication of a recession lessening, NBER notes 'economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.'
The problems associated with assigning recessions in real time are manifold. With noisy information that changes over time, changing relationships between economic variables, different predictions from different variables, and multiple variables of interest, it is a task that's easy to criticize when an institution hates economics, like Newsweek. However, Newsweek's criticism is not well-placed.

The NBER's approach is to avoid denoting recessions until they have a relatively large amount of data. For example, The NBER's Business Cycle Dating Committee waited 28 months to declare the end of the 2001-2003 recession. In this case, it agrees with a "real-time" approach James Hamilton developed using Stock and Watson's historical work. An example of Hamilton's work that this article has been influenced by was "Calling Recessions in Real Time" (Working Paper, 2010).

Hamilton runs a regime-switching Kalman Filter, a general tool discussed elsewhere by Corrections in "How to Lose an Election Without Really Trying" and "Census as a Celebration". Starting with the data, we can observe his assigned probability of whether the United States is in a "recession" state or not, along with the current Bureau of Economic Analysis issue of the GDP growth rate (click to enlarge):
Hamilton's approach generates results very similar to the NBER's based solely on GDP, not NBER's recession dates. We can see this by depicting Hamilton's probabilities of recessions, and coloring in both his recessions in red and NBER's in blue (click to enlarge).  Near-complete overlap with red can be seen on most blue bars.
We can see Hamilton's methods find this recession only lasting one more quarter than the NBER's Business Cycle Committee's. The calling of recessions is not a falsifiable endeavor, though updates are possible if the call is made in real time.  Nevertheless, when the NBER and James Hamilton, (who literally wrote the book on time series analysis) are susceptible to the same criticism by Newsweek, it is vastly more likely that Newsweek's understanding of the world is flawed, not theirs.

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