The Expansion is Dead, Long Live the Recovery

Chief Economist Scott Brown discusses current economic conditions.

The National Bureau of Economic Research (NBER) has formally declared that a recession began in February. The expansion lasted 128 months, the longest on record (at least back to 1854). Economic data reports should suggest that the downturn may have ended in April. That doesn’t mean everything is okay. Rather, the economy appears to have begun growing again (granted from a lower base). Fiscal support and an aggressive response from the Federal Reserve have helped to lessen the damage, but much will depend on the virus and the unwinding of social distancing. Downside risks remain. Following an initial sharp bounce off the bottom as state economies re-open, it will take many quarters to get back to where we were at the beginning of the year.

The NBER defines a recession as “a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators.” A recession begins (and an expansion ends) when the economy reaches a peak of economic activity and ends (as another expansion begins) when the economy reaches a trough and starts growing again. The NBER does look at Gross Domestic Product (GDP), but that is only available on a quarterly basis. Monthly figures play a key role in the determination, including nonfarm payrolls, industrial production, real (inflation-adjusted) business sales, and real personal income. These are the same four components in the Conference Board’s Index of Coincident Economic Indicators.

In declaring beginning and ending dates for recessions, the NBER’s job is to be definitive, not timely. For example, the start of the 2007-2009 recession, which ran from December 2007 to June 2009, was not declared until December 2008, while the ending date was declared in September 2010, more than a year after the recession had ended. The declaration of a recession normally depends on the duration of the downturn. One negative quarter has never been enough. However, the NBER noted that “the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.”