Official Definition of a Recession by the Nber

The official definition of a Recession by the NBER in its announcement of the 2007 peak is, “ a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.” The NBER states that the currently available estimates of quarterly aggregate real domestic production do not speak clearly about the date of a peak in activity.

The four key monthly series that the NBER uses to determine the peaks and troughs are: payroll employment, real personal income less transfer payments, real manufacturing and wholesale-retail trade sales and finally the Federal Reserve Board’s index of industrial production.

Payroll employment is a measure of the number of “filled” jobs in the economy that is based on a survey of employers by the Bureau of Labor and Statistics. Real personal income less transfer payments is a measure that attempts to reveal real gross domestic income. The measurement is adjusted from nominal to real terms using an interpolated quarterly GDP deflator. Real manufacturing and wholesale-retail sales is the third monthly indicator. It is a flawed measurement because it only covers goods not services and does not deduct the sales of imported goods. The last monthly indicator is the index of industrial production that includes measurements of manufacturing, mining and utilities but excludes services and government. NBER states that the payroll measurement is the most reliable and comprehensive measurement of employment but that their recession dates are not solely based on this measure.

Concerning the table on page 7 of NBER-peak01.pdf none of the peaks have seen a consecutive turn in all of the four monthly series. The peak in 1990 is the one that appears to have the closest turns in the four indicators with industrial production lagging by only two months to the peak of real income.

The NBER does not use real GDP as their primary indicator because it is a measurement that comes out quarterly. The NBER uses monthly indicators to track a monthly chronology of peaks and troughs instead of using a more broad measurement like GDP that is subject to broad revision.

According to NBER2007.xls GDP appears to peak in the second quarter of 2008 with income being flat from the fourth quarter of 2007 until the second quarter of 2008.

There is a wide variance in the two measurements of GDP in the first two quarters of 2007 then they track together until the fourth quarter of 2008.

If I were looking at the quarterly and monthly variables separately I would put the peak in economic activity two quarters later based of the GDP measurements because of the clear up tick of real GDP in the second quarter of 2008. On the other hand if I were looking at only the monthly variables I would agree with the December date