Recession: The Measure of Economic Weakness (Forex Hound)

Four economic series provide the measure of recession: real personal income, real business sales, industrial production and employment. Currently, two of these indicators suggest caution on the part of decision-makers. Employment and real business sales appear to be holding up well at this point. Risk, not reward, remains the watchword for this year.

Four economic series provide the measure of recession: real personal income, real business sales, industrial production and employment. Currently, two of these indicators suggest caution on the part of decision-makers. Employment and real business sales appear to be holding up well at this point. Risk, not reward, remains the watchword for this year.

 

Putting a Framework on Recession

 

How does the National Bureau of Economic Research (NBER), the official arbiter of U.S. business cycles, determine the beginning and end of a recession? A peak in the business cycle marks the end of an expansion and the beginning of a recession. The traditional role of the committee is to maintain a monthly chronology so they refer almost exclusively to monthly indicators. As a result of this monthly focus, the committee gives relatively little weight to real GDP, which is only measured quarterly and subject to continuing, large revisions. The broadest monthly macroeconomic indicator is employment. The committee also generally studies another monthly indicator of economy-wide activity, real personal income less transfer payments (top graph) adjusted for price changes. In addition, the committee refers to two indicators with coverage of manufacturing and the broader sales and distribution of goods: (1) industrial production (middle graph) and (2) the volume of sales of the manufacturing and trade sectors (bottom graph).

 

Following the NBER methodology, we created ‘spider charts’ for all four indicators as if September 2007 was the business cycle peak. Real personal income less transfer payments, peaked in September 2007 and then fell slightly over the next two months. Industrial production also confirms September 2007 as the peak. The real manufacturing, trade and sales data are still trending upward as of November, but the advance report on retail sales for December indicated a decline in at least one component of business sales. On the positive side, our fourth indicator, employment continues to increase. This is the one factor that appears to be keeping the economy from falling into a clear recession since employment is holding up household income and, therefore consumption.

 

The September Break: Data Suggest Downturn Could Have Begun Then Up until September our key indicators did not suggest a recession, but since then these same indicators show a clear shift in the economic winds and therefore a bias toward caution for decision-makers. We can never be absolutely sure about recessions but we can learn with the data. They suggest that a recession is an even bet unless public policy, as it did in 1987, reacts swiftly and effectively to avert the downturn. To corroborate this cautious outlook on the economy our empirical model of recession suggests a 59 percent chance of recession as of the November data.

 

 

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