The stakes for the group are high, in part due to the extraordinarily unusual economic conditions two years after the last recession, at the start of the coronavirus pandemic. The economy contracted in the first quarter of the year, and many Republicans say a recession is already here, with Thursday’s release expected by many analysts to show a second consecutive quarter of negative growth. But from President Biden, administration officials instead point to other indicators showing the economy remains strong and insist the committee would be wrong to declare a recession.
The labor market is starting to show cracks
Political haggling isn’t supposed to matter to the eight economists who decide when recessions start. Their decision is almost certainly months away, if at all: the committee typically waits long after a recession begins to declare it, only acting when the evidence has become overwhelming, sometimes even after the recession has ended. This puts the pressure on the organization from the outside – to quickly deliver a verdict on one of the most important questions facing economic decision makers – directly at odds with its mission to provide unassailable empirical decisions.
As a result, what seems like a simple question: Is the US economy in recession? — is partly decided on a subjective basis at a later date, sometimes when it no longer seems relevant, by experts meeting behind closed doors of a private commission.
“By far the most important thing to try to convey is that the committee is not trying to do real-time dating on whether we are in a recession,” said MIT economics professor James Poterba, chairman. of the NBER and member of the committee, in an interview. “There is often tremendous interest in this issue and what many people hope for, but the task of the committee is to create a coherent history of the turning points – the peaks and troughs of the American economy.”
The group’s calculus could become increasingly difficult in the coming months, amid confusing economic conditions that defy easy characterization. The political ramifications for the committee could be significant as the Biden administration faces growing public anger over high inflation and its economic management. Congressional Republicans will also be keen to seize on a ruling that the economy is in a recession, trying to capitalize on voter discontent ahead of this fall’s midterm elections.
Asked about upcoming economic numbers, Biden on Monday challenged the idea that a recession was imminent. It’s part of a broader campaign by the administration in recent weeks to refute GOP claims that a recession has already begun. Top economic officials, including Treasury Secretary Janet L. Yellen and White House National Economic Council Director Brian Deese, appeared on cable news Sunday and Monday to reiterate their view that the US economy isn’t technically in a recession – and wouldn’t be even if GDP figures show a second straight quarter of contraction.
There are risks to this strategy, however, because if the United States enters a recession later, its current assurances will seem misguided, especially after the administration already wrongly dismissed the threat of inflation last year.
US policymakers brushed off the inflationary threat until it was too late
“We’re not going to be in a recession, in my opinion. The [unemployment] the rate is still one of the lowest we’ve had in history,” Biden said Monday. “Hopefully we will move from this rapid growth to steady growth.”
At the heart of the challenge facing the committee of economists is that it relies on more than half a dozen criteria to measure the onset of a recession. The general impression many Americans – and some commentators – have is that a recession is defined as two consecutive quarters of negative economic growth. But that’s not how the NBER, or most economists, think of it. Instead, the committee weighs factors such as payroll levels, retail sales, industrial production and personal income in a comprehensive assessment to determine whether the economy is in recession. The committee points out on its website that “there is no set rule about what measures inform the process or how they are weighted in our decisions.”
As Deese told CNN, “In terms of the technical definition, it’s not a recession – the technical definition takes into account a much wider range of data points.”
What is a recession? Answers to your economic questions.
Traditionally, all these different economic measures move in tandem, which facilitates the work of the committee. Usually, when growth declines, employment, consumer activity, and other measures of economic health also decline. But the economy since the start of the pandemic has confounded previous patterns and could do so again. Economic growth could end up declining for two straight quarters – although the first quarter in the United States was negative largely due to technical factors, such as a temporary increase in overall imports – even as unemployment remains among the lowest levels in American history. Consumer spending also remained strong, unlike a typical recession. If unemployment remains low even as growth contracts, NBER economists could face a thorny challenge in deciding how to categorize the situation.
Predicting the decision of the committee is made more difficult by its mode of operation. As part of the NBER, the Business Cycle Dating Committee is run by a private, nonprofit group — not the federal government or state statistical agency. Its members are chosen by the chairman of the NBER “in consultation” with the chairman of the committee, according to Poterba.
Committee meetings are not made public. They are standing in a closed conference room on the third floor of the Cambridge, Mass., office building where the NBER is headquartered. They don’t meet on a set schedule: Stanford board chairman and economist Bob Hall is responsible for calling the meetings. During long periods of steady economic growth, the board may go years without having anything to discuss and, as a result, may not hold any meetings. It wouldn’t even confirm when past meetings took place.
“The committee doesn’t announce its meeting schedule, and that’s something we don’t talk about,” Poterba said.
Its last public statement was on July 19, 2021 – when the committee said there was a recession between February and April 2020, the shortest in US history.
The eight economists on the committee are among the most respected in their field. Some have served in Democratic administrations, but former members have also included GOP appointees. In addition to Poterba and Hall, the members are Christina Romer and David Romer of the University of California at Berkeley; James Stock of Harvard; Robert Gordon, North West; Valerie Ramey, University of California San Diego; and Mark Watson of Princeton.
The NBER has its roots in the post-World War I era, after a Colombian-educated economist who worked for labor and trade organizations and AT&T’s chief statistician formed a new organization after realizing that they had little shared empirical data with which to conduct policy debates. . In the early 1960s, the Commerce Department began publishing a summary of trading conditions that cited the NBER’s work on the ups and downs of the business cycle, giving it a kind of federal imprimatur, according to Poterba.
Poterba stressed that the board is aware of the public’s thirst for advice on a recession, but does not let it dictate its decisions. Economic data is often revised afterwards, and the committee is careful not to announce a verdict contingent on data that may change later.
“The NBER really tries to provide benchmarks for researchers; he’s not trying to provide short-term political talking points for either side,” said Steve Miran, who served as a senior Treasury Department official in the Donald Trump administration and co-founder of Amberwave Partners, an investment fund. “We would all like it to be binary – 0 to 1, recession or not – but the truth is that it is much more of a continuum. It requires an interpretation of the duration, depth and speed of contraction, as well as sectors of the economy that are contracting and why…. And that requires an element of judgment.
This does not mean, however, that the members of the council are always in agreement. Harvard economist Jeffrey Frankel, who served on the committee for about 25 years, said there’s generally unanimity on the big questions of whether a recession is starting or ending, but differences can emerge over the month. precise where a recession started or ended.
“There are times when the right answer isn’t clear, and the kind of thing there can be disagreement about is someone wants more data – like revisions to the [gross domestic product], for example — and someone else saying, “It’s already been 11 months, and if we wait any longer, people will think the news will be too stale,” Frankel said. “That tension is always a problem.”