Whose Recession?

February 17, 2004

There seems to be some confusion as to when the economic recession of 2001 actually began. Business Week's Michael Mandel does an excellent job of showing how the nonpartisan National Bureau of Economic Research and Bush's Council of Economic Advisors diverge significantly on their respective interpretations of the economic data. Admittedly, we are dealing with interpretation rather than definite facts, so there is plenty of room for conflicting analysis.

In layman's terms, an economic recession is defined by two consecutive quarters of negative GDP growth. According to the US Department of Commerce's Bureau of Economic Analysis the nation's GDP shrank in the first three quarters of 2001. The 4th quarter of 2000, by contrast, saw 2.1% growth. (Note: all these numbers are in chained dollars, not 2003 dollars.) Score one for the NBER.

However, economic analysis is a complex subject. Reducing the start of a recession to just one criterion is at best simplistic. An economic downturn affects many aspects of the nation's economy in different ways. We need more information to say for sure.

One important aspect of gauging a recession is Industrial Production. From the NBER's own site, we can see that Industrial Production seems to peak around September of 2000. (Fig. 2) The NBER claims that Production tends to lead the recession, but then admits that in this case there's an unusually long lead-time. Score one for the CEA.

Income? According to the Department of Commerce again, Disposable Personal Income fell in the first two quarters of 2001. NBER: 2, CEA: 1.

Unemployment? The US unemployment rate was pretty steady at just around 4% until January of 2001, when it began a steady rise, reaching 5.7% by year's end. NBER: 3 CEA: 1.

Certainly, other data can be found to support either theory, but based on this information, I'm inclined to believe the 2001 recession began exactly then, in the first quarter of 2001.