Watch the wheels
Last Monday, the National Bureau of Economic Research (NBER) announced that its Business Cycle Dating Committee had just established that June 2009 marked the trough in business activity thus marking the official end of the recession. The NBER’s release, however, warned against misinterpretation of its findings.
Their words: “In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favourable or that the economy has returned to operating at normal capacity. (…) Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.”
Commentators have sniggered at this scholastic note: “The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007.” Though it is true that it is a mere corollary of their “decision” that another recession has ended, the point of the statement is lost if not taken in the context of the NBER’s longer-term view.
The 1920-born NBER (16 of the United States’s 31 economics Nobel laureates have at some point been its researchers) has traditionally had a long-term interest in the business cycle. Wesley Mitchell, whose classic work on business cycles appeared in 1913, guided the NBER between 1920 and 1945. With the Great Depression (that started in 1929 and whose end in the US appeared to begin in the spring of 1933), looming large in its early research history, the NBER continues to be concerned with how the business cycle works. The length of this recession (at 18 months the longest one since WWII, with the 1973-75 and 1981-82 episodes as runners-up with 16 months) has revived interest in the Great Depression.
Especially interesting to recession watchers today is the long tail of the Great Depression. In fact, the US gross national product did not return to the 1929 level before WWII and its unemployment rate – although down from the 25 per cent of 1933 – was still around 15 per cent in 1940. Indeed, business observers such as Richard Davis of the Consumer Metrics Institute (CMI), visualise the recession of 1937-1938 as “a recession nested within the Great Depression”.
“The economy,” says Davis, “had been improving significantly from early 1933 through 1936 before the wheels came off the recovery in mid-1937.” Back in the present, the CMI – whose daily indexing of US consumer demand is closely watched by investors with a vital interest in the state of the wheels of the current recovery – warned, just over a week ago, that “consumer demand is still contracting, albeit at a slower rate”. More dramatically, it added that though the “flood-gauge may have just peaked, the downstream damage remains inevitable – it simply hasn’t arrived yet”.
The NBER was on the frontline in 1937, providing Roosevelt with data about the new downturn. Today, its concern with underlining as precisely as possible the point of demarcation between the recession whose tail we are experiencing and any future one, is not intended to encourage premature cries of pleasure. On the contrary, it reflects the NBER’s interest in understanding the tail ends of business cycle contractions. The underlying concept is that you cannot understand (and therefore cannot prepare yourself for) recessions unless you understand business cycles.
President Obama was right in pointing out that the unemployed and all those that have suffered and continue to suffer from the recession will not be consoled by the news that the recession is technically over. They will hardly jump for joy when they learn that a committee of academics has “decided” that what it defines as a recession ceased fitting its definition of it in June 2009.
Earlier this month, the Bureau of Labour Statistics announced: “The number of unemployed persons (14.9 million) and the unemployment rate (9.6 per cent) were little changed in August (2010). From May through August, the jobless rate remained in the range of 9.5 to 9.7 per cent.”
Further: “In August, the civilian labour force participation rate (64.7 per cent) and the employment-population ratio (58.5 per cent) were essentially unchanged. The number of persons employed part-time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 331,000 over the month to 8.9 million. These individuals were working part-time because their hours had been cut back or because they were unable to find a full-time job.”
On September 20, the same day as the NBER’s release, the Bureau of Economic Analysis stated: “Personal income in 27 states has now climbed above the current dollar level reached before the recession. Excluding transfer receipts (such as unemployment compensation and social security retirement benefits), however, personal income in only two states (…) has returned to that level.”
What has all this got to do with us in Malta where, as usual, everything is doing just fine and where whatever is just short of performing perfectly is due to what Labour governments may or may not have done 12 to 14 or even 23 to 39 years ago? A country like ours, completely dependent on foreign markets for our goods and services, must watch the wheels of the recovery very carefully and gear itself for the tougher world economy that is emerging from the recession.
Readers are encouraged to read the texts I quoted. They may be accessed at www.nber.org/cycles/sept2010.html, www.consumerindexes.com/Overview.pdf, www.bls.gov/news.release/empsit.nr0.htm, and www.bea.gov/newsreleases/regional/spi/spi_newsrelease.htm.
The original of this article appeared in Dr. Vella’s regular coloumn on The Times of Malta on September 27, 2010 and may be accessed at http://www.timesofmalta.com/articles/view/20100927/opinion/watch-the-wheels