Wednesday, December 3, 2008

Why did we pick December 2007 as the start of the recession?

As is the case surprisingly often, different economic indicators give very different answers to the date of the peak. Of the monthly indicators to which the BCDC gives primary attention, the most important is jobs, more specifically Payroll Employment (from the Labor Department’s Bureau of Labor Statistics). It peaked in December 2007, and has been declining ever since. My personal favorite indicator is Total Hours Worked (which is closely related, because it is number of people employed times the average number of hours per worker). Hours Worked also peaked in December, as shown in the graph below. Of the quarterly indicators, the most important is aggregate economic activity, more specifically, Output. 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. A simple-minded average of the two peak dates would seem to point to midnight of New Year’s Eve, December 2007, as the peak. Another (comparably unsatisfactory) way of forcing the output data to cough up a precise month is to look at Personal Income, which is available monthly. The BCDC’s computed measure of real personal income less transfers peaked in December 2007. It would be wrong to claim that all roads arrive at the same destination, December 2007. Other indicators point to other dates, some earlier, some later. If we are very lucky, revisions that the BEA makes in July 2009 will help resolve the discrepancy between the GDP and GDI measures somewhere in the middle. But perhaps the best characterization of the output measures is that they show a rough plateau from the fall of 2007 to the summer of 2008. That the employment statistics speak more clearly allows them to have predominant say.

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