Tuesday, July 13, 2010

Recessions and recoveries--my not-so-secret formula . . .

Harry Truman once said, “It's a recession when your neighbor loses his job; it's a depression when you lose yours.” That folksy definition may get to the heart of our personal economic fears. On the other hand, it’s not a terribly precise measurement. The financial press often uses the recessionary definition of two or more consecutive quarters of declining Gross Domestic Product (GDP). GDP is defined as the total market value of all final goods and services produced within the country in a given period of time. On the other hand, that measure fails to include several official U.S. recessions. (No wonder Truman also demanded, “Give me a one-handed economist!”)

The National Bureau of Economic Research is the official arbiter of business cycles. They've told us when the recession started, but the NBER has been rather reluctant to tell us whether or not the recession is over. They use a number of different indicators to make that determination and they like to wait until all the data finalized.

However, I have a not so secret formula for determining the beginning and ending of a recessionary period--and it resides in just one number.

When tracking monthly year-over percent changes in nonfarm payroll jobs and past recessionary periods in the postwar period (see chart), it becomes abundantly clear that when the year-over rate of job growth trends downward and eventually leads to job loss, we’re in a recession. A “year-over” percent change merely equals the percent change between one month’s employment and the same month a year earlier. For example, it represents the percent change between nonfarm employment in June 2009 and June 2010.

In the postwar period, this method has ALWAYS worked. Plus, thanks to survey data, it’s about as current as indicators get—particularly for the nation and the state. And finally, it’s available for a wide variety of locales (unlike GDP). It's even easier to mark the end of a recession--when the job losses get smaller and not larger. By this reckoning, the recession for the U.S. ended in July or August of 2009. Utah bottomed out in August 2009. So, when the NBER gets around to calling the end of the recession, my bet is that it will be in the summer of 2009.

I know. It doesn't "feel" like a recovery, but it is. We've turned the corner and the economy is getting better rather than getting worse. This time, we've just dug ourselves a rather large recessionary pit, so the recovery takes longer. According to survey data, Utah posted its first year-over employment gains in May 2010. The U.S. is poised to show year-over job growth in July.

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