Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
- Industrial Production
- Real Income (excluding transfer payments)
- Real Retail Sales
Photo: St. Louis Fed
The weight of these four in the decision process is sufficient rationale for the St. Louis FRED repository to feature a chart four-pack of these indicators along with the statement that “the charts plot four main economic indicators tracked by the NBER dating committee.” In his July 10thBloomberg TV interview, ECRI’s Lakshman Achuthan cites these four in his remarks. He says, and I quote “When you look at those four measures, they are rolling over.” On September 13th Achuthan again reappeared on Bloomberg TV and reasserted the ECRI recession call, stating again that the US is already in recession and that future revisions to the data will support their call. See the last 30 seconds of the interview for comments on downward revisions.
Are these indicators really rolling over? First, here are the four as identified in the Federal Reserve Economic Data repository. See the data specifics in the linked PDF file with details on the calculation of two of the indicators.
The FRED charts are excellent. They show us the behaviour of the big four indicators currently (the green line) as compared to their best, worst and average behaviour across all the recessions in history for the four indicators (which have start dates). Their snapshots extend from 12 months before the June 2009 recession trough to the present.
The Latest Indicator Data
The latest updates to the Big Four was today’s release of the September Industrial Production (the purple line in the chart below), which rose 0.4 per cent over the previous month following a 1.4 per cent decline the month before. Yesterday the Census Bureau’s Retail Sales number was released, and with today’s release of the Consumer Price Index we can calculate Real Retail Sales (the green line in the chart below). The latest 0.6% increase gives us a strong three-month upward trend after four months of flat or contracting data. Both indicators beat analysts’ expectations.
As the average of the Big Four indicates (the grey line), economic expansion since the last recession was flat or contracted during three of the nine months in 2012. The average for August, down 0.3 per cent, was the sharpest month-over-month decline of the 2012. The preliminary average for September, with Personal Income yet to be reported, shows definite signs of improvement. The data, of course, are subject to revision, so we must view these numbers accordingly. When ECRI’s Achuthan made his July assertion that the indicators were rolling over, the data didn’t appear to support the claim. The August data was indeed weak, but September is showing strength, with personal consumption, measured by Real Retail Sales, as the backbone of improvement. Personal Consumption Expenditures accounts for about 70% of GDP (illustrated here).
Background Analysis: The Big Four Indicators and Recessions
The charts above don’t show us the individual behaviour of the Big Four leading up to the 2007 recession. To achieve that goal, I’ve plotted the same data using a “per cent off high” technique. In other words, I show successive new highs as zero and the cumulative per cent declines of months that aren’t new highs. The advantage of this approach is that it helps us visualise declines more clearly and to compare the depth of declines for each indicator and across time (e.g., the short 2001 recession versus the Great Recession). Here is my own four-pack showing the indicators with this technique.
Now let’s examine the behaviour of these indicators across time. The first chart below graphs the period from 2000 to the present, thereby showing us the behaviour of the four indicators before and after the two most recent recessions. Rather than having four separate charts, I’ve created an overlay to help us evaluate the relative behaviour of the indicators at the cycle peaks and troughs. (See my note below on recession boundaries).
The chart above is an excellent starting point for evaluating the relevance of the four indicators in the context of two very different recessions. In both cases, the bounce in Industrial Production matches the NBER trough while Employment and Personal Incomes lagged in their respective reversals.
As for the start of these two 21st century recessions, the indicator declines are less uniform in their behaviour. We can see, however, that Employment and Personal Income were laggards in the declines.
Now let’s look at the 1972-1985 period, which included three recessions — the savage 16-month Oil Embargo recession of 1973-1975 and the double dip of 1980 and 1981-1982 (6-months and 16-months, respectively).
And finally, for sharp-eyed readers who can don’t mind squinting at a lot of data, here’s a cluttered chart from 1959 to the present. That is the earliest date for which all four indicators are available. The main lesson of this chart is the diverse patterns and volatility across time for these indicators. For example, retail sales and industrial production are far more volatile than employment and income.
Are the Big Four Rolling Over?
As of the latest data, they are potentially showing some early signs of rolling over. History tells us the brief periods of contraction are not uncommon, as we can see in this big picture since 1959, the same chart as the one above, but showing the average of the four rather than the individual indicators.
The chart clearly illustrates the savagery of the last recession. It was much deeper than the closest contender in this timeframe, the 1973-1975 Oil Embargo recession. While we’ve yet to set new highs, the trend has collectively been upward. But a closer look at the average shows a clear slowing of the trend in 2012.
The behaviour of all four of these indicators will be critical as we the fourth quarter and the 2012 holiday season.
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