Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared in Project Syndicate on June 14th, and in The Guardian. This month marks the 10th birthday of the US economic recovery. June 2009 saw the “trough,” the end of the Great Recession of 2007-09. (As always, a declaration that the recession was over could as easily have been phrased less cheerfully as a declaration that the economy had hit “rock bottom.”) Who or what deserves credit for the length of the expansion? There is plenty of credit to be parsed out to explain the end of the free-fall that the economy was experiencing in January 2009 (a free-fall that was reflected
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Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A appeared in Project Syndicate on June 14th, and in The Guardian.
This month marks the 10th birthday of the US economic recovery. June 2009 saw the “trough,” the end of the Great Recession of 2007-09. (As always, a declaration that the recession was over could as easily have been phrased less cheerfully as a declaration that the economy had hit “rock bottom.”)
Who or what deserves credit for the length of the expansion? There is plenty of credit to be parsed out to explain the end of the free-fall that the economy was experiencing in January 2009 (a free-fall that was reflected in job loss, output loss, and financial market decline) and the beginning of the recovery in June 2009. There is also plenty of blame that can be allocated to explain the slow pace of the ten-year recovery that followed (at half the growth rate of the 1991-2001 expansion).
But the best answer to the question of the length of the 2009-19 expansion is disappointingly simple. The 2007-09 recession was the worst since the 1930s. The deeper the hole, the longer it takes to climb your way out.
Some would say that Carmen Reinhart and Ken Rogoff accurately predicted that the recovery from a recession that arises in a severe financial crisis would take longer than a recovery from other recessions. But I would say that their impressive prediction was the depth of the recession itself; the long recovery time in turn follows mostly from the depth of the hole.
The ten-year mark is especially noteworthy because – assuming the US is not unknowingly already in a new recession – the current expansion ties the record for the longest previously recorded US expansion. That previous record was set by the 10-year expansion of March 1991 to March 2001. (Technically, records of US troughs and peaks only go back to 1854.)
The 10-year US expansion, however, is far from the record-length expansion among countries internationally. That honor goes to Australia’s economic expansion, which began in mid-1991 and still continues to this day, at the age of 27 years, soon to attain 28.
The basis for dating the expansion in Australia and in almost all other countries is the rule that defines a recession as two or more consecutive quarters of negative GDP growth. The United States is almost alone in officially setting the dates of the beginnings and ends of recessions, not by the two-quarter rule, but by a less mechanical process that factors in employment and a variety of other economic indicators in addition to the core criterion of GDP. (Japan‘s government also uses a less mechanical procedure.)
Troughs and peaks in the US economy are declared by the Business Cycle Dating Committee of the National Bureau of Economic Research. The NBER is a private nonprofit research organization. (I am a member of this committee, but do not speak for it and rather am writing this column purely in my personal capacity.) The NBER dates are official in that the Commerce Department and other US government agencies rely on them, for example, in their published charts.
There do exist, for some other countries, institutions that also depart from the automatic two-quarter rule and provide dates for business cycle turning points based on a variety of criteria. But their chronologies are not recognized by the corresponding national authorities and tend to receive far less attention in the media. Such bodies include the OECD, the CEPR’s Business Cycle Dating Committee for the Euro Area, and other institutions.
The method for dating business cycles is a consequential choice. For example, the Italian economy has experienced several separate recessions since 2008 if one uses the standard two-quarter rule, but one long recession if one applies a more common-sense approach.
There are clearly both pros and cons to the rule of two negative quarters, versus the less mechanical approach of the NBER committee. One advantage to the automatic rule is that it generally appears more objective.
Another advantage is that the public is told of a cyclical turning point with a lag of only a few months, that is, as quickly as the GDP statistics are compiled. The NBER, by contrast, typically waits a year or longer after the fact, until all the data are in, before announcing a turning point. Its announcements are then duly ridiculed for the long lag.
One major disadvantage of the two-quarter rule is that GDP statistics are usually revised subsequently, which can require revising the cyclical turning points retroactively. For example, a 2011-12 recession that had been announced in the United Kingdom was subsequently erased from the record when the GDP numbers were revised in June 2013. As a result, claims that in 2012 had appeared in the speeches of British politicians and in the writings of researchers, made in good faith at the time, were subsequently rendered false. The reason that the NBER waits so long before announcing a trough or peak is so that it can be reasonably sure that it won’t have to revise the call in the future. Similarly, the Japanese government waits for a year or so.
A relatively minor reason for considering alternatives to a procedure based on GDP alone is that it does not allow the designation of precise months, since most countries compile GDP statistics only on a quarterly basis.
Some technical complications require interpretation even regarding which measure of gross domestic output to use. The NBER committee puts real Gross Domestic Income “on an equal footing” with the more widely known expenditure-based measure of real Gross Domestic Product. The consequences of different statistical methodologies for measuring GDP can be huge in some countries, for example, India in recent years.
Another reason for abandoning the rule of two negative quarters is more fundamental. Some countries experience sharp slow-downs or periods of “diminished economic activity,” like the rest of us, and yet have long-term trend growth rates that are either so high or so low that the negative-growth rule does not capture what is wanted.
Consider, first, a case where the rule would yield excessively frequent “recessions.” In Japan, population growth is negative and productivity growth is far below what it used to be, so that its output trend has averaged only 1 per cent in recent decades. The result is that even small fluctuations can turn GDP growth negative. The two-quarter rule would suggest that Japan has a new recession more often than once every 4 years (7 downturns in the 26 years since 1993).
Now consider the opposite problem, how the two-quarter rule can yield infrequent recessions. To be sure, much of Australia’s success can be attributed to the adoption of structural reforms since the 1980s, such as openness to trade and a switch to a floating exchange rate. One of the reasons why Australia’s GDP shows no downturns in the last 28 years, however, is that its rates of growth of population and labor force are substantially higher than in the US and other OECD countries, especially Europe and advanced countries in East Asia.
China is another example. It has not had a recession in 26 years (since 1993). Of course the performance of its economy has been outstanding. Like most countries, it suffered in the Great Recession of 2008-09. But even a growth loss of 8 percentage points — from 14% in 2007 to 6 % briefly in 2009 — was not enough to turn China’s GDP growth negative. The reason, of course, is that its trend growth rate has been very high (due to productivity growth).
Assuming the US expansion continues in July, it will break the US record length of ten years (120 months) set in 1991-2001. But it is sobering to consider that if the dates of American business cycles were determined by the rule applied by most other countries, the recession of March-November 2001 would apparently be erased. It did not include two consecutive negative GDP growth quarters, but rather two negative quarters separated by a positive one. (This is a case where other indicators like employment help to make the call.) Under that interpretation, the apparent US record would have been set by the 17-year interval from 1991 (Q1) to 2007 (Q4) and the current expansion would not be close to breaking it.
This post written by Jeffrey Frankel.