Recapping GDP Data for 2001

The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the official body which dates business cycles, announced the peak of the last business cycle in November 2001 (http://www.nber.org/cycles/main.html) and the trough in July 2003. The last recession occurred between March 2001 and November 2001. Therefore, there is a considerable time period before this committee officially declares the onset and end of a recession. The NBER uses four coincident indicators -- industrial production, payroll employment, inflation adjusted personal income less transfer payments, and the volume of sales of the manufacturing and trade sectors adjusted for price changes -- to establish the dates of a recession. At the present time, of these four indicators, industrial production appears to have peaked in September. Payroll employment and real personal income less transfer payments also appears to have peaked in September. Data for the other two sets of indicators are awaited. Revisions of economic data could change the current perception of these variables. Mr. Feldstein, President of the Business Cycle Dating Committee, indicated yesterday that the U.S. economy is not in a recession but the risk of a recession is growing. Therefore, he recommends additional easing of monetary policy and a fiscal stimulus package to prevent a recession from occurring.

Here is how some economic indicators appeared as they were published in 2001 before the series of revisions that were eventually put in place. The following tables list percent change in inflation adjusted gross domestic product (GDP), consumer spending, and non-residential investment at a seasonally adjusted annual rate (SAAR) as they were published before annual and benchmark revisions. The estimates as they stand today reflect complete revisions.

Real GDP in 2001 showed a contraction only in the third quarter; this information was published in the last week of October 2001. Subsequent revisions indicate two quarters of declines in real GDP during 2001. The NBER announced the onset of a recession only on November 26, 2001.

Consumer spending is likely to take the biggest hit in the current slowdown that is projected for the fourth quarter of 2007 and most of 2008. In 2001, consumer spending showed noticeably stronger growth in the first two quarters compared with revised data as available today.

Non-residential investment expenditures showed large declines before and after final revisions during each quarter of 2001. At the present time, equipment and software spending is most likely to post a setback but the declines may not be as large as what occurred in 2001 because the extended high-tech boom of the late-1990s was not repeated in the expansion which began in November 2001 (see chart 3). At the same time, outlays on structures could post a large decline (see chart 4).

We wrote these comments to highlight that official GDP data lags in pointing out that a recession is underway. Jobless claims and the ISM manufacturing survey results are indicators which give early signals. The composite index of the ISM manufacturing survey fell below 50 (50 is the demarcation mark between expanding and contracting factory sector) well before the onset of a recession in five out of eight recessionary periods since the 1950s. Of the three periods when an early warning failed to occur, there was an overlap in the 1980 and the 1981-1982 recessions and in the December 1969- November 1970 recession there was a lag of only one month. The only period when the composite index (see table 4) turned below 50 after an extended period following the onset of a recession was in the recession that occurred between November 1973 and March 1975. Based on this evidence, we should be watching this survey carefully in the months ahead.

Initial jobless claims, scheduled for publication tomorrow, contain a wealth of timely and valuable information. As shown in chart 6, initial jobless exhibit a marked upward trend well before a recession and peak during or after a recession. During the week ended January 5, the 4-week moving average of initial jobless claims at 343,750 is the highest since August 2004, excluding the Katrina-related spike. The 4-week moving average has risen 34,250 from a low of 303,500 in the week ended May 19.