This article first appeared in the St. Louis Beacon, Dec. 2, 2008 - When economists at the National Bureau of Economic Research announced on Monday that the United States has been in a recession since December 2007, the stock market took another plunge.
Though the news was certainly no surprise, the ruling of this private, nonpartisan organization mattered because it is considered the official judge.
When these economists use the R-word, you can take it to the bank.
Still, if the recession started a year ago, why did it take these experts so long to figure it out? The Beacon put that question to Stuart Greenbaum, an economics professor at Washington University who is an expert on the banking industry and financial markets.
"You must recognize that this experience we're going through - however you want to characterize it - is unique. We've not had a recession of this particular design in memory. People are going back to the 1920s and 1930s to find some experience comparable. So by almost any measure, it's an extraordinary event. And I think that explains a good bit of confusion not only on dating but also on making policy, interpreting and almost every aspect of the work that's done about this recession," said Greenbaum.
The business cycle dating committee of the bureau studies economic data, including gross domestic product (GDP), income, production, sales -- and pays particular attention to job figures. The economists noted that December 2007 was the last month U.S. employers added jobs.
The liquidity crisis in the financial sector has added an additional dimension to the problem, Greenbaum says. While Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke have been roundly criticized for their actions to stave off the financial crisis, they're treading in uncharted territory.
"I have great sympathy for these people in Washington who are trying to make policy in this maelstrom. Not that I can't criticize them and find fault with the decisions they've made, but the metaphor is of a blind man walking around in a darkened room trying to figure out where the light switch is," he said.
In the past, a recession has been defined as two consecutive quarters of a negative growth in GDP, but this recession doesn't jibe with that definition, Greenbaum said.
"So it speaks to, I think, the unusual pattern that we've gone through. And there's always been dispute about the exact dating of these things anyway -- even when the daters haven't been challenged by this kind of simultaneous global slowdown, combined with an absolutely pervasive liquidity crisis," he said.
Greenbaum points out that there is nothing magical about the official announcement -- many financial and economic experts have been using the term recession for months.
"This is a bunch of economists sitting around a room trying to divine when some subtle phenomenon had occurred,'' he said. "So what if they're off by a quarter? At the end of the day, this is all about people suffering. Not whether they started suffering on Christmas or the spring equinox."
Greenbaum said it's not as important to know when the recession started as when it will end - and that's anyone's guess.
"The real question is: Is this calamity a two-year phenomenon or a 10-year phenomenon? That's the operative question," he said.
According to a press release issued by the National Bureau of Economic Research, it usually takes 6 to 18 months for the economists to declare that a recession has started -- and they never forecast how long it will last.
Defined
Recession: A significant decline in economic activity spread across theeconomy, lasting more than a few months, normally visible inproduction, employment, real income and other indicators. A recessionbegins when the economy reaches a peak of activity and ends when theeconomy reaches its trough. Between trough and peak, the economy is inan expansion.
Source: The National Bureau of Economic Research
What is the National Bureau of Economic Research?
The organization, which was founded in 1920, is a private, nonprofit,nonpartisan research organization that studies the economy.
A committee comprised of some of the nation's topeconomists from the bureau is charged with dating the beginning and endof business cycles, such as recessions. Committee members are: RobertHall of Stanford University; Martin Feldstein and Jeffrey Frankel ofHarvard University; Robert Gordon of Northwestern University; JamesPoterba of MIT; David Romer of the University of California, Berkeley;Victor Zarnowitz, the Conference Board.
To find out more, go to www.nber.org
