After months of depressing economic indicators, mind-boggling financial bailouts, mounting job losses and collapsing retirement accounts, an elite team of economists formally pronounced what most of us already knew: We’re in a recession.
In fact, we’ve been in a recession for a year, according to the National Bureau of Economic Research (NBER), which reached its consensus during a conference call Friday and shared it with the rest of us Monday.
The revelation, while less than shocking, still had the power to move the markets. The Dow Jones Industrial Average plummeted nearly 680 points Monday, taking back nearly half of the gains it made during last week’s record climb.
The nation’s 73 months of economic expansion officially ended in December 2007, according to the Business Cycle Dating Committee of the NBER, a private, nonprofit research organization based in Cambridge, Mass. But many analysts expect this downturn to last much longer than average postwar recessions and to be much deeper than the two most recent economic contractions.
The business-cycle committee, established in 1978, generally takes six to 18 months after a recession has begun to make its official declaration. “The committee waits long enough so that the existence of a recession is not at all in doubt. It waits until it can assign an accurate date,” the committee said Monday.
A year after the recession began, the U.S. economy remains mired in the most serious financial and credit crises since the Great Depression. Banks and other financial institutions have been battered by losses from defaulting mortgages after the housing market collapsed. While the housing bubble began to deflate in mid-2006, prices have been falling at an accelerating rate.
The overdose of bad economic news continued Monday, including a horrific report on manufacturing in November, leading the Dow to a 7.7 percent loss on the day. Yet again, most of the stock market’s losses occurred late in the trading session.
To battle the economic downturn, the Federal Reserve has already reduced its target short-term interest rate to 1 percent and engaged in extraordinary operations to inject massive amounts of liquidity into the nation’s financial system.
“At this point, the scope for using conventional interest-rate policies to support the economy is obviously limited,” Federal Reserve Chairman Ben S. Bernanke said in a speech Monday.
The incoming Obama administration and Congress are considering a fiscal stimulus package that could total $700 billion, potentially sending the budget deficit well above $1 trillion.
“I have confidence that we are pursuing the right strategy to stabilize the financial system and support the flow of credit into our economy,” Treasury Secretary Henry M. Paulson Jr. said in a speech Monday. “This consistent effort to strengthen our financial institutions so they can support our economy is critical to our progress through the current economic downturn.”
The current contraction has already lasted 12 months, two months longer than the average of the 10 previous postwar recessions.
The 2001 recession lasted eight months, ending in November 2001.
The 1990-91 recession also lasted eight months. Both were considered brief and mild by historical standards, leading many economists to say that the business cycle had been smoothed. Now, economists are projecting that the current recession will be much longer and deeper than the previous two.
The most recent economic forecast by the Federal Reserve expects the current downturn will last through the middle of 2009. That would make this recession longer than the 16-month recessions that ended in March 1975 and November 1982. The unemployment rate peaked at 9 percent in 1975 and 10.8 percent in 1982.
“It’s looking more likely that the recession will not end until the latter part of next year,” said Nigel Gault, chief U.S. economist for IHS Global Insight. “Unemployment will clearly go up to 8 percent and could reach 9 percent,” he said.
The unemployment rate now stands at 6.5 percent, the highest since 1994. Goldman Sachs recently predicted that the unemployment rate would reach 9 percent by the end of next year.
Mr. Gault predicted that the economy will contract at an annualized rate of 4 percent to 5 percent during the fourth quarter. That would be the steepest quarterly decline since the first quarter of 1982.
During the Great Depression, unemployment peaked at 24.9 percent in 1933, when economic output was 32 percent below its 1929 level.
The NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real [inflation-adjusted] income and other indicators.”
The NBER does not adhere to the popular definition of recession, which describes it as two consecutive quarters of declining gross domestic product. So far, that hasn’t happened in this recession. It didn’t happen during the 2001 recession, either.
Rather, the NBER committee seeks to pinpoint changes in the economy on a month-to-month basis. It especially focuses on the business cycle’s turning points as it moves from expansion to decline (the peak) and from decline to expansion (the trough).
Payroll employment was the most decisive statistic in the current cycle, the committee said. Employment peaked in December and has declined every month since then. During the first 10 months of 2008, employment declined by nearly 1.2 million jobs. Employers shed a hefty 284,000 jobs in September and 240,000 jobs in October, the two largest monthly declines so far this year. Employment numbers for November will be released Friday, and surveys of economists suggest the economy lost more than 300,000 jobs last month.
The current 12-month-old downturn means that a full-blown recession had been in effect for more than half a year when former Sen. Phil Gramm famously complained in July about “a nation of whiners” who were experiencing a “mental recession.” The comments were made in an interview with reporters and editors of The Washington Times.
The members of the NBER’s business-cycle committee are considered to be among the most accomplished and authoritative economists in the country.
Robert Hall, an economist at Stanford University, currently serves as chairman of the seven-member committee, which includes Martin Feldstein, Harvard economist, president emeritus of the NBER and a former chairman of the Council of Economic Advisers (CEA) in the Reagan administration; James Poterba, MIT economist and NBER president; Victor Zarnowitz of the Conference Board; and Robert Gordon of Northwestern University.
Christina Romer, whom President-elect Barack Obama recently named chairwoman of his CEA, resigned from the committee last week and did not participate in its Nov. 28 deliberations. Federal Reserve Chairman Ben Bernanke was a member of the committee before he joined the Fed as a governor.
Sixteen of the 31 American Nobel Prize winners have been researchers at the NBER. Besides Mrs. Romer, six others have served as chairman of the White House CEA.