Wednesday Aug 03 2022

Who are eight economists that decide when US is in a recession?

In the United States, two consecutive quarters of negative economic growth does not automatically mean the country has entered a recession.— AFP via Getty Images
In the United States, two consecutive quarters of negative economic growth does not automatically mean the country has entered a recession.— AFP via Getty Images

The US Commerce Department announced that the country’s gross domestic product had fallen for the second consecutive quarter, although President Joe Biden said the economic data overall “doesn’t sound like a recession”. In most countries, two successive quarters of GDP decline qualify as a recession — but not in the United States, where an independent body of eight economists called the Business Cycle Dating Committee makes such a determination.

The GDP of the world's largest economy fell at a 0.9% annualized rate last quarter, the Commerce Department announced Thursday, the second successive quarter of negative growth. In many countries, this would prompt the government to announce that the economy had entered a recession. But not in the United States.

Given low unemployment and strong job growth, President Joe Biden told reporters the new data "doesn’t sound like a recession to me", shortly after the Commerce Department's report was published.

The same GDP figures would be sufficient for France, for example, to consider itself in a recession. The country’s National Institute of Statistics and Economic Studies (INSEE) defines a recession as "a decline in Gross Domestic Product over at least two consecutive quarters". The Organisation for Economic Co-operation and Development (OECD) applies the same definition.

Biden and top White House officials on Thursday touted several positive facts about the US economy, including that employers are still hiring, unemployment is at 50-year lows and manufacturers are still investing.

Eight economists

Japan is the only other democratic country that does not follow the OECD definition of a recession. There, the Japanese government "is the referee, but the government departs from the automatic two-quarter rule and considers other indicators" such as employment or consumption, said Harvard economist Jeffrey Frankel in a 2019 talk on the American economic exception.

In Japan, the democratically elected government calls the shots. But in the US, the arbiters of recession are just eight economists who form an independent group called the Business Cycle Dating Committee, part of the National Bureau of Economic Research (NBER).

The NBER's definition "emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months". GDP contraction is, therefore, only one of the factors the committee considers, along with unemployment rate, wage levels and investment.

Not only do these arbiters determine whether the US economy is in recession, but they are also the ones who can officially determine that a recession is over.

A politically sensitive issue

The economy is always a very politically sensitive issue in Washington, especially as voter anxieties about it could tank Biden's fellow Democrats in the November midterm elections.

Democrats currently have a slim majority in the House of Representatives and the Senate. But if history is to be a guide, the midterm elections could be disastrous for the party — as they were during the first terms of Democratic former presidents Bill Clinton and Barack Obama.

Republicans and conservative political commentators are citing declining GDP figures, soaring prices and a slowing housing market to blame Biden for the state of the economy. The president's approval rating has fallen to a record low of 36%, according to Reuters/Ipsos polling, with the economy listed at the top of voters’ concerns.

Even during a meeting with participants selected by the White House, Biden heard a mixed description of the US economy. “We're seeing a slowdown” in consumer spending, Wendell Weeks, CEO at materials science firm Corning, told Biden, citing the company’s sales to television and computer makers.

However, US job growth averaged 456,700 per month in the first half of the year, while domestic demand has continued to grow. Labour Department data on Thursday showed initial claims for state unemployment benefits decreased slightly.

"It doesn’t make sense that the economy could be in recession with this kind of thing happening," Federal Reserve Chair Jerome Powell told reporters on Thursday.

Twelve months to name a recession

Until the Business Cycle Dating Committee says the US is in a recession, Biden can say, in good faith, that the country is not.

The president may have time on his side: “The average lag between a turning point [a recession or a recovery] and the [group’s] announcement is 12 months," wrote Frankel, who has sat on the committee for more than 20 years.

The committee’s eight economists waited until December 2008 to declare that a recession had begun in late 2007. In the interim, Lehman Brothers had already gone bankrupt and the financial crisis was wreaking havoc around the world.

But the committee’s lag time can be a problem when politicians need a quick assessment on which to base decisions, according to a National Public Radio (NPR) programme on the “recession referees”.

A socialist economist and a laissez-faire executive

The American exception on identifying a recession dates back to the aftermath of World War I and the unlikely friendship between Nachum Stone, a socialist economist, and Malcolm Rorty, a chief statistician at the American Telephone and Telegraph Company (AT&T) who was famous for his laissez-faire philosophy, according to the US business magazine Forbes.

The two could not agree on any economic concept, but one: The US needed a body that could establish some indisputable facts to serve as a basis for economic debate.

Thus, in 1920, the NBER was born, an independent institute that was supposed to bring together the brightest minds from all economic viewpoints to reach consensus on pressing issues such as measuring growth rate, employment or recessions.

Nearly 60 years later, in 1978 this organisation founded the Business Cycle Dating Committee, whose task was to date, with extreme accuracy, the country’s various economic cycles — hence its lag.

"There are often revisions to the GDP, for instance," James Poterba, a professor of economics at the Massachusetts Institute of Technology, chairman of the NBER and member of the Business Cycle Dating Committee, said in an interview with NPR.

"I think that, all in all, our US approach to determining the start of a recession works rather well compared to the purely mechanical process" of using only the indicator of two successive quarters of GDP decline, Poterba added.

The UK Office for National Statistics revised GDP growth upwards in 2013, showing there was no recession at the end of 2011 as previously thought.

Lacking transparency and diversity

But the committee faces criticism over its structure and lack of transparency. “They have no predetermined meeting dates and their deliberations are private. There are no fixed term dates and the final determination of who gets to serve on the committee is made by one man,” NBER chairman Poterba told CNN Business.

"It's like the 'fight club' of economy," NPR said.

All eight members are from top US universities (Harvard, Princeton or Stanford), are White and are over 60 years old. Moreover, there are only two women (including one who is married to another member).

US Treasury Secretary Janet Yellen, the first woman to serve in the role and as Federal Reserve chair, has argued that the lack of women and minority economists at the Fed and in the government skews viewpoints and limits the scope of discussion.

"It's incestuous," Richard Wolff, professor emeritus of economics at the University of Massachusetts, told CNN.

"Fundamental issues that ought to be part of the conversation in our economic system are excluded as if they don't exist," said Wolff, who also attended Harvard as an undergrad, received his master's degree at Stanford and his PhD at Yale, where he was a classmate of Yellen's.

"You have a community of old, White graduates from the same elite institutions and what they think is important is important. If you think differently, you're out of the club."

The lack of social and racial diversity has arguably already had an impact on the committee's work. At their last meeting in July 2021, members stated that the last recession — linked to the COVID-19 pandemic — had ended in April 2020. Their reasoning was based primarily on an unemployment rate that had almost returned to pre-pandemic levels. But the poorest Americans and minorities were still far from having regained their lost purchasing power.

"More diversity on the committee will bring in perspectives and other ideas about how we understand the health of the economy," said Valerie Wilson, director of the Program on Race, Ethnicity and the Economy at the Economic Policy Institute, in an interview with CNN.