“The Coming US Consumption Bust”, by Nouriel Roubini

A nice summary of the current situation.  Professor Roubini is far more optimistic than I.  That’s said with trepidation, as economic forecasting is among the most difficult of human endeavors.

The Coming US Consumption Bust: 12 Reasons Why the US Consumer is in Serious Trouble and Faltering“, Nouriel Roubini (wikipedia bio), RGE Monitor, 3 September 2008 — Reposted here in full, with permission.

It is by now clear that the shopped-out, saving-less and debt-burdened US consumer is on the ropes and that there will be a significant and persistent contraction of real consumption for the next few quarters. About a dozen separate negative headwinds – to be described in detail in this note – are now hitting the US consumer while the positive effects on consumption of the tax rebates are already fading away.

That rebate boost was supposed to stimulate consumption until August of this year instead after a recovery of retail sales, real personal spending and consumption in April and May real retail sales and real personal consumption spending have fallen already in June and July. So consumers stopped consuming in spite of the tax rebates instead of spending such rebates (so far only 30% of them have been spent). This suggests that real consumption will certainly fall in Q3 and will continue to fall for a while into the middle of 2009. Real consumption did not fall in the 2001 recession and you have to go back to the 1990-91 recession to see a single quarter of negative consumption growth.

Why will consumption keep on falling for quite a while? There are at least a dozen separate factors explaining why we will now see a sharp and persistent fall in real consumption:

(1) US consumers are shopped out and saving-less; the low savings rate of the US household sector fell almost into negative territory as the positive wealth effect of rising home prices – until 2006 – led to overspending. Now a retrenchment of consumption and rise in savings is necessary

(2)  Home prices are now falling and therefore households cannot use their homes as ATM machines – like until 2006 – and borrow against it to spend more than their income. Recent studies suggest that the wealth effect of housing on consumption is large, larger than previously estimated (closer to 12-14 cents on the dollar rather than 5-7 cents on the dollar)

(3)  Home equity withdrawal (HEW) that peaked at $700 billion in 2005 is now down to about $24 billion (practically zero). And financial institutions are sharply cutting back on outstanding home equity loan obligations. Thus, borrowing against housing wealth is now collapsing. Even with moderate estimates of HEW effects on consumption (25 cents on the dollar rather than the 50 cents on the dollar estimated by Greenspan and Kennedy)

(4)  There is an additional wealth effect of the stock market on consumption; and with major indices down almost 20% from peak this is an additional effect.

(5)  The increasing credit crunch is spreading – based on various surveys – from subprime to near prime and prime mortgages, to home equity loans and now to credit cards, auto loans and student loans. So the price of credit/borrowing is rising while its quantity is falling and this will reduce the ability and willingness of households to borrow to spend.

(6)  Debt ratios for the household sector are high and rising: the debt to disposable income ratio for average US households has increased from 100% in 2000 to almost 140% today.

(7)  Not only debt ratios are high but debt servicing ratios are high and rising for households given the reset of interest rates to higher levels on mortgages, credit cards, autos loans, student loans and other consumer credit.

(8)  Even after the recent fall in oil and commodity prices from their peaks such prices are about 50% higher than a year ago and 300% higher than six years ago. For any given income, rising oil, energy, transportation and food prices implies a reduction in real disposable income that erodes purchasing power. And lower income households have a larger share of their consumption basket going to food, energy, heating, transportation and gasoline; this the rise in commodity prices erodes their purchasing power more than for higher income individuals.

(9)  Nominal and real wage growth has been anemic in the last few quarters and slowing down over time. Thus, real incomes – especially for workers – are not rising significantly.

(10)  While GDP growth in Q2 has been robust (3.3%) the other measure of output – on the income side rather than on the demand side – that is the Gross Domestic Income (GDI) has been very weak (growing only 1.9% in Q2 and falling relative to Q2 of a year ago). So measures of income growth – and not that the gap between GDP and GDI has been rising over time for complex statistical reasons – suggest very anemic income growth that is bearish for consumption.

(11)  Consumer confidence is sharply down and close to levels we have not seen since the two 1970s stagflation episodes.

(12)  Now the last factor – job generation – that was supporting consumption in spite of the headwinds described above is faltering: employment in the private sector has fallen for 8 months in a row; and overall employment (including public one) has fallen for 7 months in the row). And other indicators of the labor market suggest persistent and continued weakness.

The 12 negative headwinds described above are significant and persistent while the only positive factor supporting consumption – the $100 billion of tax rebates – was temporary to begin with and failed to boost consumption even over the horizon (through all of Q3 of 2008) over which it was supposed to have an effect: consumption started to fall in real terms already in the latter part of Q2 (in June of 2008). And with consumption being 70% of aggregate demand the effect of such a fall in consumption (until at least Q2 of 2009) on GDP growth will be more severe and persistent.

Thus, expect to see a contraction of GDP in quarterly figures already in Q3 of this year and all the way until the middle of 2009. Since the US recession started in Q1 of this year (based on the five indicators used by the NBER) the 18 month U-shaped recession will be a W-shaped recession given the blip in GDP in Q2 following the tax rebates and an unsustainable improvement in net exports. So we will observe a double-dip W-shaped recession.

The improvement in net exports is not sustainable because the view that the rest of the world would rescue the US from a recession through a boom of US exports is now challenged by two major factors: the US recession is spreading to all of the G7 and almost all of the advanced economies (representing 55% of global GDP); and since US exports are the imports of Europe, Japan, Canada, etc. the fall in these economies will slow down their imports of US goods. Second, the recent strengthening of the US – as the G7 are slumping into a recession – will reduce the improvement of the US trade deficit.

A shopped-out, saving-less and debt-burdened US consumer is now stretched like never before, at its tipping point and starting to falter and contract spending. Since we have not seen a fall in consumption – even for a single quarter – for the last 18 years the effects of this sharp retrenchment of US consumption will be severe and cause a protracted and sharp US recession, at least a 18 months recession rather than the 6 months recession predicted by a delusional economic consensus.

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about this subject

  1. A brief note on the US Dollar. Is this like August 1914?  (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
  2. The post-WWII geopolitical regime is dying. Chapter One   (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II  (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
  4. Death of the post-WWII geopolitical regime, III – death by debt  (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  5. Geopolitical implications of the current economic downturn  (24 January 2008) – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
  6. A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
  7. What will America look like after this recession?  (18 March 208)  — More forecasts.  The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
  8. The most important story in this week’s newspapers   (22 May 2008) — How solvent is the US government? They report the facts to us every year.

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

14 thoughts on ““The Coming US Consumption Bust”, by Nouriel Roubini

  1. The logic here seems impeccable. Drastically reduced demand will have an effect on production, which in turn will reduce wages and further reduce demand. One question comes to mind: these are aggregate figures, reflecting the whole economy, but they sound particularly applicable to younger families (30s to 40s). What about the wave of baby-boomers about to retire and liquidate their home values? In my little community of current retirees, no one seems to be very alarmed.

  2. If the coming recession is like the positive GDP growth ‘recession’ starting in Q1 (based on NBER new definitions) — then it won’t be so sharp, nor such a huge problem.

    If we use the traditional recession definition–two or more quarters of negative GNP growth–the US ain’t in one. Yet. We haven’t had one quarter of negative GNP growth yet.

    The monetary lesson from prior recessions has been learned: to avoid recessions, or reduce them, lower the interest rates (inflate). The EU central bank did NOT (kept it at 4.25%), so the slowing EU has not slowed enough to make the bank think there’s enough of a problem to lower rates — I think that’s right.

    There has been a huge wealth shift from oil-importing to oil-exporting countries, which has caused huge reductions in US (and EU) consumer cash available for non-oil spending. But that cash has often been spent by the oil-importers (raising non-US spending), or invested (raising non-US investment).

    The and an unsustainable improvement in net exports points are not so strong. Prior gloom & doom predicted continuing fall in the USD, this new gloom & doom predicts little new exports … because the USD is not falling any more.

    It is always the case that these two fight: if the dollar falls, exports increase. If not, steady USD, steady economy. No sharp consumption retrenchment, but a move back to a more sustainable consumption level.

    Still, that will likely mean 18 more months (from Sep 2008) of low GDP growth, and slower income growth — possibly the ‘new’ recession.

    Tax increases will only make this worse. So the policies the voters choose in Nov (as shown by their choice of representatives) will have a big influence (with adjustments starting even before election winners take office).

    Fab, did you plan on this being an anti-Obama post?
    .
    .
    Fabius Maximus replies: Most of this is just wrong.

    (1) Taking you last point first, this is not a political post. The economic decline now underway is a bi-partisan affair, resulting from economic policies followed for the last quarter-century.

    (2) These are not “new NBER new definitions.” The “two quarters” is just a oversimplification, of little analytical value. Which is why any serious analysis instead uses the NBER definitions. “Traditional” definitions have little role in economic, or in any science.

    (3) GDP is not a reliable guide, which is why the NBER uses more accurate and specific criteria. Also note: Gross Domestic Income (the other side of the double-entry national account bookkeeping) is a more reliable indicator than GDP, and has declined two consecutive quarters (-0.8% in Q4, -0.5% in Q1). For more on this see “Estimating Probabilities of Recession in Real Time Using GDP and GDI“, Jeremy J. Nalewaik, Federal Reserve, 19 December 2006.

    (4) “positive GDP growth ‘recession’ starting in Q1”

    Why don’t you start with the positive GDP growth in Q4 of 2007? Oh yes, that was revised down from +0.6% to -0.2%. That is the general rule: upward revisions in booms, downward revisions in busts. Q1 also will probably be revised down. 2007’s employment growth will probably be revised entirely away.

    These economic numbes are not like counting apples. It takes a year or more to get the accurate numbers.

    (5) I have written several posts about the “prior doom and gloom” meme; this is almost total nonsense. The consensus economic forecasts have been far too optimistic for well over a year. For more on this (including actual forecasts) see here, here, and here.

  3. One of the things that is slowly becoming apparent is that the best metafor for the current economic mess is a VERY slow-motion train wreck on a very dark night. We have some idea as to what is happening by the sounds we are hearing (mostly screaming) and can predict the overall trend by our knowledge of the economic terrain that it is occuring in but important details that would give us a clear understand (ie. are we personally about to get hit by flying debris) are hidden from us.

    Every time Wall Street and the media think that things are finally about to turn around something happens to show them that they are wrong. My newspaper reported today that over 9% of all US mortgages have at least one missed payment and that troubled prime mortgages now outnumber troubled subprime mortgages. Finally, it included a graph showing the states with the highest percentage of mortgage defaults and the traditional states (California, Nevada, and Florida) are being supplanted by other states (Mississippi and Georgia).
    .
    .
    Fabius Maximus replies: I like this metafor. However this is always true. The consensus of economists’ forecasts has never predicted a recession, and at its very start usually sees fair weather ahead.

    The Fed-induced recessions of the 1970’s were at least visible immediately (In the words of Chairman William McChesney Martin Jr.,*the Fed is like “the chaperone who has ordered the punch bowl removed just when the party was really warming up.”). The 1980-82 recession was the ultimate example of this.

    Other than that, recessions and booms are mysterious, understood only long after the fact. This results to some degree from the low quality of our economic statistics, with large revisions long afterwards. Part of this results from the immature state of economic theory.

    Much of economists poor forecasting record results from hubris, like other confident annoucements by scientists over the centuries. Lord Kelvin is perhaps the poster child for this phenomenon, as seen in these quotes.

  4. The Economist cites an OEDC report that says of the world’s seven major economies, Britain is the only one facing recession. It goes on with this comment on America’s economy:

    “The picture looks even more dismal compared with the United States. The American economy is growing again, the dollar is bouncing back and some people even reckon the housing crisis has touched bottom. Whether this is mainly owing to a $180 billion fiscal handout (whose effects may fade), America’s inexhaustible energy and now-flourishing exports, or the simple fact that it stumbled earlier is a matter of debate. Whatever the answer, Britain’s prospects appear grim in comparison. ”

    Of course, the Economist is one of the major boosters of free-market capitalism, along with the WSJ; they are almost obliged to talk this way!
    .
    .
    Fabius Maximus replies: Very odd. I have never understood why people consider the Economist so interesting. I have read that it is mostly written by recent graduates (affecting a “grey bearded” tone), and it usually shows in their analysis. Consider Q2 real GDP numbers.

    Real GDP was negative for the EMU (aka Eurozone) in Q2: Germany -2.0%, France -1.2%, Italy -0.8%. UK, Neatherlands, and Spain were all roughly zero.

    Japan -2.4%, Hong Kong -1.4%.

    Canada was negative in Q1, bouced to slightly positive in Q2. The US economy was stimulated by our innovative “borrow $180B from foreign central banks and spend it” plan, but even here the domestic economy shrank: excluding net exports, -0.5%.

  5. I disagree.We are in a new kind of recession. The long V. It drops precipitously due to a burst bubble in a sector, may hang at the bottom a while then moves up jaggedly for a period as long as 30 mos.
    Why? In recent decades we have seen an unprecedented accumulation of wealth in America. Even with this mortgage mess in real dollars we are still far wealther than ever and have enormous depth to that wealth beyond necessity on average.Trying to keep up with the curve, many have overcommitted. They are skewed toward the bottom of the the scale. Wealth is not income. You can have no job and little income and still get wealthy. You can also have a giant income and never get wealthy. The wealthy can spend when they want as long as their wealth is not tied up. The majority of people who’s wealth is tied up have it tied up in their homes. The rest are biding their time. Many boomers like myself and older are sitting around saying “when is this going to stabilize so I can put my money in something promising” Equilibrium will be reached when the mortgage industry shakes out. That may start happening this weekend if the gov’t takes over fannie and freddie. There will be a segment of consumers worried about spending with no savings, a smaller group watching carefully and another smaller group who have barely cut back waiting for return on investment. As stability is achieved the last group will start to reinvest and spend and generate jobs where there is opportunity. The middle group will slowly increase spending as seems prudent. The bottom group are over committed for years to come they will only slowly pull out of their doldrums. Hence the long V recession. It was very different when our grandparents saved for a rainy day even though they might have scrapped for every penny.
    .
    .
    Fabius Maximus replies: You may be right. However the record of forecasting these things is terrible, even for teams of economists supporting by massive econometric software models. I suggest not making any large bets that you are correct.

  6. I knew this type of reply would come. One must always remember. Economists are just sociologists who really like math. It is behavior they study and behavior evolves over time therefor no economic prediction is ever dependable. Economics is one of the great intellectual disciplines of the last 2 centuries. So is evolutionary theory. But I don’t see anyone using Darwin to predict if their child will be born with downs syndrome. Or if they’ll live through tomorrow. It is the business class that anticipates economic movements as best as humanly possible. It is the economists who tell us what happened and what might happen. As for me I bet my ass everyday on this type of insight in my businesses. Most economist just go back to the drawing board at the think tank. What is less valid about my conceptual construct vs. the above numerical construct dependant on statistics developed according to rules which always lag behind the evolving social conditions on the ground? Nothing. Hence the unreliability of even great economists predictions. I go back to the bear. If one wishes to not get caught in a bad spot keep your eyes open, your nose wet, your ears up and your mind open. Distraction is the enemy.

  7. Fabius,
    I’ll make one prediction(which as a member of the small business class is as far as I will go) I’ll bet you if we review this again in 30 mos. I’m closer than Prof. Roubini. Either way I’ll still survive.
    .
    .
    Fabius Maximus replies: I will bet that you will survive. As for the rest, in every field there are amateurs who believe they are better than the pros who do this for a living. The stadium bleachers have them at football and baseball games. The stands of people watching the trotters are filled with them. Wall Street, Atlantic City and Las Vergas make a business from them.

    Economists like Prof Roubini built reputations making far from consensus forecasts. In his case, during the 1997-98 Asian Crisis.

    Skill at these things is easy to test. Subscribe to the Wall Street Journal. When they publish their monthly consensus forecasts of top economists, record your guesses somehow (like a comment on this site). After two years tell us how you do vs. the pro field. Good luck.

  8. I never said I was better than “the Pros” I bet against Prof Roubini. If you want to create an average of all the “pros” you will out predict all others. This is called a consensus. It does not mean you will predict the result in a relevant way. I note you did not respond to my question in comment 6. What makes my conceptual construct less valid than his numerical construct? One must always remember about expert opinions: its not the logic that fowls them up or the history or the lack of diligence; its the assumptions they have to base their work on. And I repeat: economists work with statics based on rules established by models often way behind social changes. I could not possibly develope my ideas without their historical work. But to bet the farm on it? No damn way. And the politicians don’t either. Nor does the Fed or the Treasury. They hedge their bets as best they can. I can tell you I’ve talked to former corporate leaders who basically take this stuff with a double dose of salt. And that’s the idea: having faith in this stuff leads to distraction. Having doubt keeps your ears pricked. The purpose of the economist is to prick our ears up when the time is right and to let us bear down when the time is right. Not to ever bet the farm on. I note you quote his “reputation building” forecast of the 97-98 Asian crisis. How about something relevant like the post 9-11 decline in spending by all U.S. consumer groups? Did he predict that? Did any economist predict that? No. Again its easy to point to what they did predict. Few point out all they didn’t predict. If they we’re infallible even as a group recession would be impossible. I suggest you adopt a little more faith in those of us who take the pulse of the economy hourly and have a little more doubt about those who work in ivory towers. By the way some of my best friends make their living in ivory towers.
    .
    .
    Fabius Maximus replies: You missed the point, which I was attempting to make as gently as possible (I prefer to avoid personalities in these discussions). Prof Roubini’s work is published here and and elsewhere — plus the invitations to prestigious conferences and TV appearences — because of his distinguished record of accurate analysis and forecasting.

    He gives us another perspective on the present events (which we can dimly see), and a look at one possible future. His discussion is like everything on the FM site, one view of things on the edge of the known — looking out into the fog.

    If you do not find that useful, AOK. Like everything on the FM site, it’s free.

  9. I find your last comment on my comment absolutely agreeable. Looking out into the fog. We are on the same wave length. And unless he has x-ray vision the future is entirely in doubt. I do not ignore his opinion. But I wished to make the point that for some reason economists have been granted the imprimateur to pass judgement on the future we accord to no other profession. We just need to level the playing field to where they are equal to say oncologists.
    .
    .
    Fabius Maximus replies: I do not understand why you say “economists have been granted the imprimateur to pass judgement on the future we accord to no other profession.” How are they different than doctors giving views on their patients, or generals forecasting future military needs, or climate scientists forecasting global warming?

  10. why:
    -your quote: “A nice summary of the current situation” how do you know or accept this as viable? Or is it just a feeling? is it objective? Or do you like many suspend doubt when economists speak?
    -“It is by now clear that the shopped out, savingsless and debt burdened consumer is on the ropes…” what? Doctor: “Mr. Jones you have cancer your worn out burned up and on the ropes” Gen Petreus to congress: “Iraq is worn out burned up and on the ropes” Climate scientist in a professional journal: “the climate is worn up,burned out and on the ropes” More objective speech. And he repeats this. Are all us consumers shopped out, savingsless and debt burdened? Where is the evidence of these 3 statements in his article? Show me evidence of a trend in tanking retail sales, show me where the average consumer has negative savings, show me where the average consumer is in a negative debt situation.Or even in an historically bad debt situation. Not in there.
    -Again economists are specialized sociologists. Imagine if a sociologist opened a study with that opening sentence. Would it be taken seriously?
    -“So consumers stopped consuming in spite of the tax rebate” how does he pass judgement on that? He has no evidence. They may have stopped before after or with. How have consumers “stopped consuming” thats ridiculous. Last I checked people didn’t stop eating, or driving, etc. “Mr. Jones you’ve stopped breathing but your still standing”
    -“delusional economic concensus” What? this is him saying “the other economists are delusional” there’s objective speech
    -why does he terminate his recession at “at least 18 mos” 18 mos is not tied to a fact. He states all kinds of facts but has no ties to periods of economic activity related to recession length . How about “the w recession of x-year had a duration of x- months. The w-recession of y-year had a duration z-months. Interpreting these recessions and their attendant factors one can conclude this recession will have a duration of at least 18 mos.” Not in there. And can not be evaluated except on his reputation and faith. Could it be 2 years? or 6 years?
    -Ask yourself: If you had to have surgery based on this would you go under the knife or would you get a second opinion? In short its a list of facts and a disconnected list of conclusions we are supposed to do what with? presented in unprofessinal language. Where are the if-then statements? Where are the “Multiple prior studies have shown a duration of x leads to y” statements we can verify?” Not in there. Like many economists he waved a wand and so it will be. or not.
    Etc, Etc, I deleted multiple paragraphs from this comment to keep it brief
    .
    .
    Fabius Maximus replies: I do not know what you mean by “viable” in this sentence.

    “your quote: ‘A nice summary of the current situation’ how do you know or accept this as viable?”

    It is a nice summary of the current situation because his brief description matches closely with the available data. His forecasts are another matter; in a year we will know if they too were accurate.

  11. Viable was a bad choice of words. How do you know this article “summarizes” the current situation. You may believe it is descriptive of the current situation but you cannot know it is complete unless you have studied all the possible parameters affecting the economy and have concluded that he includes all that are relevant. Again evidence that individual economists get listened to because individuals like them, not because they are individually proven to be accurate regarding their analyses to a standard we expect from other professions say at least 50% of the time.

    Again regarding his forecast. He lists a bunch of facts but provides no active connection between them and his 18 mos+ time period. How is this useful to anyone but those who have faith in his forecast? Though his purpose is to edify us, he provides no education to his reader about what could affect a change in his time period. You just have to have faith and look back sometime past 18mos.

    We’ll just have to disagree on this one, I’ll just not comment on economic posts on this blog and spare everyone else the continuation of this arguement until a quote comes up by an economist who provides some basis in his article to evaluate his prediction in a useful way while the economy is moving forward. And who doesn’t give open ended predictions like 18mos +. And who doen’t put hyberbole about behavior in his article that can only be verified as accurate by doing an on the ground study of a large sampling of consumers.

  12. One more comment before I go. This whole arguement supports exactly what I did in my first comment. Assign for myself a likely maximum period of time for this recession. If I were to use only this economists evaluation regarding how to percieve the recession I would have no choice. He leaves it open ended and therefor unactionable. Opinions by professionals that can’t be acted on are in general useless by themselves. The only useful thing he does with this is make you go find more economists to listen to.

  13. Fab, I don’t believe the Fed paper you site indicates that I’m wrong at all. Here’s the July 2007 summary (of the Dec. 2006 paper open for comments): This work estimates Markov switching models on real time data and shows that the growth rate of gross domestic income (GDI), deflated by the GDP deflator, has done a better job recognizing the start of recessions than has the growth rate
    of real GDP. This result suggests that placing an increased focus on GDI may be useful in assessing the current state of the economy. In addition, the paper shows that the definition of a low-growth phase in the Markov switching models has changed over the past couple of decades. The models increasingly define this phase as an extended period of around zero rather than negative growth, diverging somewhat from the traditional definition of a recession.

    Clearly, as of July 2007 the traditional definition of recession had not been ‘officially’ supplanted.
    This is important because of what a ‘recession’ is, and means. You are citing Roubini, who’s claiming the US Consumer “is in Serious Trouble and Faltering”.

    But here’s the truth — if some huge number of comfy middle class consumers have their consumption growth stopped, they will not be in serious trouble, and their lives won’t falter that much.

    In politics, the out-of-power party has a vested interest in emphasizing how bad it is, in order to generate enthusiasm for change. If there is a real negative GDP recession, it would call for more drastic action than the ‘around zero’ growth periods.

    Al L. — please don’t stop making comments; I think your view is better than Roubini’s in this case. But I also think Fab’s disagreement and your responses improves the analysis.

    But Fab, again, is half-wrong in saying The “two quarters” is just a oversimplification, of little analytical value. While the little analytical value may be true, in terms of scientific understanding, the general issue for gov’t is more binary. Act or not Act? For instance, hand out cash in rebates or not? And, if the gov’t DOES act, it ruins the series trend for scientific non-action observation.

    You can talk about how serious economists use the NBER jargon rather than something more simple, but the press and interested lay persons has mostly continued the 2 quarters negative GDP definition, like the authors of the Fed Reserve paper note.

    Here’s the NBER note:
    The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

    OK, from this I can see how you’d say I was wrong. But where are we today? From the NBER webpage: The determination that the last contraction ended in November 2001 is the most recent decision of the Business Cycle Dating Committee of the National Bureau of Economic Research. (made July 17, 2003)

    Kind of useless as far as using science to base current actions on, I’d say.
    .
    .
    Fabius Maximus replies: I do not know where you are going with all this, but it is beyond the focus of this site, about geopoltics. A few final notes.

    1) The quote you gives does not say that GDP defines recessions. It is assessing GDP as a single-metric indicator of recessions. The literature has these kind of papers assessing the utility of most econ stats as indicators.

    2) The NBER is almost universally used as the official determining the start and end of recessions. They explain their method clearly here. If you prefer some other method, I suggest contacting them — or perhaps carrrying the debate to a economics-focus site like James Hamilton’s Econobrowser. It is too technical for this site, which generally uses standard expert definitions for discussion (so they do not get bogged down in minutia like this).

    3. NBER does not tell us the start and end dates in an operationally useful manner. However, we know their five criteria and can — as Roubini does — asses the current conditions. They are all now at levels associated in the past with recessions. Given the poor quality of real-time economic data, that is all we can say with confidence at this time. This is all we have on which to make economic decisions, both public and private.

Leave a Reply