An egghead explains the recession call
When the National Bureau of Economic Research made its official recession declaration yesterday, a couple of questions came to mind. One, as expressed in one of the comments on our story, is, “DUHHH. Did it really take them that long to figure that one out??” The other, for folks who pay attention to statistics, is, “How can the recession be a year old already? I thought the economy was growing for part of this year.”
Thankfully, Jeff Frankel, a member of the NBER’s Business Cycle Dating Committee, has answers. On his blog, he explains the belated recession call this way:
In past cycles, media reports have sometimes taken the line “Ivy Tower Eggheads Finally Figure Out What Everybody Else Has Known All Along.” The implicit critique is that the committee takes too long after the event - typically almost a year - to make its declaration. One short answer is that our job is to be definitive, authoritative, but not fast. We don’t want to have to revise our dating of the peaks and troughs later …. We leave it to others — pundits, forecasters, consulting companies, financial newsletters, and so on — to try to get there first. We deliberately get there last.
His explanation of the December 2007 start date is a bit more complicated. Government figures show that gross domestic product, the most widely watched measure of the economy, grew in the first and second quarters of this year. But, Frankels said, employment has been shrinking since January, and something called gross national income has been shrinking for even longer. Here’s his explanation of GDP vs. GNI:
The Commerce Department’s Bureau of Economic Analysis computes two measures of output: Gross Domestic Product (GDP) and Gross National Income (GNI). The two should be the same in theory, but differ in practice due to measurement errors. GDP receives far more public attention — in part because its advance estimate comes out first — but in fact has no claim to be a more accurate measure of output than does National Income. The statistics currently available show that GNI peaked in Quarter 3 of 2007, whereas GDP peaked in Quarter 2 of 2008.
(2 votes, average: 4 out of 5)
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
What seems odd to me is that the “official” announcement of the recession was ostensibly the cause of the stock market dropping by about 10% the same day. In theory, that information should already have been factored into stock prices.
Ted:
You are making the assumption that the markets react resonably; AND that the people buying and selling stocks are reasonable (and act logically).
Unfortunately neither is true… The same “Experts” who dole out their forecast/prediction/guestimate are the very same who end up buying and selling the stock/bond/device that they are critiquing. It is a flawed and self perpetuating system.
Both Brad and I are right. Market prices over the long term reflect the productivity of the underlying corporate economy, but in the short to intermediate term are heavily influenced by mass psychology. When the price to earnings ratio of the stock market gets above its long term average (which is debatable but arguably not more than 15) then the “greater foool” principle is acting to drive up stock prices. In order for the same irrationality to work in the downward direction, I’d say that the P/E ratio would need to drop below about 9. That’s a worst case scenario that I don’t really expect, but have a substantial part of my assets in bonds just in case.