November 28, 2022

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Who are the economic ‘referees’ that decide if the US is in a recession?

The US Commerce Department on Thursday announced that the country’s gross domestic product fell for the second consecutive quarter, and President Joe Biden said it “doesn’t sound like a recession”. In most countries, two successive quarters of GDP decline officially qualify as a recession, but not in the United States, where an independent body of eight economists called the Business Cycle Dating Committee makes such a determination.

In most countries, the bell would have rung and the government would have officially announced the economy had entered a recession. But not in the US. The GDP of the world’s largest economy fell at a 0.9 percent annualized rate last quarter, the Commerce Department announced on Thursday, the second successive quarter of negative.

But President Joe Biden told reporters that the new data “doesn’t sound like a recession to me” shortly after the department’s report.

The same GDP figures would be sufficient for France, for example, to consider itself in a recession. The country’s National Institute of Statistics and Economic Studies (INSEE) defines a recession as “a decline in Gross Domestic Product (GDP) over at least two consecutive quarters”. The Organisation for Economic Co-operation and Development (OECD) also applies the same definition.

Biden and top White House officials on Thursday touted several positive facts about the US economy, including that employers are still hiring, unemployment is at 50-year lows and manufacturers are still investing.

Eight economists

Besides the US, Japan is the only democratic country that does not follow the INSEE and OECD definition of a recession. “The Japanese government is the referee, but the government departs from the automatic two-quarter rule and considers other indicators”, such as employment or consumption, said Harvard economist Jeffrey Frankel in an outline of a 2019 talk on the American exception to the definition of economic cycles.

In Japan, a democratically elected body, well known by the population, calls the shots. But in the US, the arbiters are eight economists who form an independent group called the Business Cycle Dating Committee, part of the National Bureau of Economic Research (NBER).

The NBER’s definition “emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months”. GDP contraction is therefore only one of the factors the committee considers, along with unemployment rate, wage levels and investment.

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Not only do these arbiters determine whether the US economy is in recession, but they are also the ones who can officially determine that a recession is over.

A politically sensitive issue

The economy is always a very politically sensitive issue in Washington, especially as voters’ anxieties about it could tank Biden’s fellow Democrats during the November 8 midterm elections for control of Congress.

Democrats currently have razor-thin majorities in the House of Representatives and Senate, but midterm elections during the first terms of former Democratic presidents Bill Clinton and Barack Obama have been disastrous for the party.

Republicans and conservative political commentators are citing the declining GDP figures, soaring prices and a slowing housing market to blame on Biden for the state of the economy. The president’s approval rating has fallen to a record low of 36 percent, according to Reuters/Ipsos polling, with the economy listed at the top of voters’ concerns.

Even during a meeting with participants selected by the White House, Biden heard a mixed description of the US economy. “We’re seeing a slowdown” in consumer spending, Wendell Weeks, CEO at materials science firm Corning, told Biden, citing the company’s sales to television and computer makers.

However, US job growth averaged 456,700 per month in the first half of the year, while domestic demand has continued to grow. Labour Department data on Thursday showed initial claims for state unemployment benefits decreased slightly.

“It doesn’t make sense that the economy could be in recession with this kind of thing happening,” Federal Reserve Chair Jerome Powell told reporters on Thursday.

Twelve months to name a recession
Until the Business Cycle Dating Committee says the US is in a recession, Biden can say, in good faith, that the country is not.

The president may have time on his side: “The average lag between a turning point [a recession or a recovery] and the [group’s] announcement is 12 months,” wrote Frankel, who has sat on the committee for more than 20 years.

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The committee’s eight economists waited until December 2008 to declare that a recession had begun in late 2007. In the interim, Lehman Brothers had already gone bankrupt and the financial crisis was wreaking havoc around the world.

The committee’s lag time can be a problem when politicians need a quick assessment to make decisions, National Public Radio (NPR) stated during a programme on the “recession referees”.

A friendship between a socialist economist and a laissez-faire executive
The American near-exception on identifying a recession dates back to the aftermath of the World War I and the unlikely friendship between Nachum Stone, a socialist economist, and Malcolm Rorty, a chief statistician at the American Telephone and Telegraph Company (AT&T) who was famous for a laissez-faire philosophy, according to the US business magazine Forbes.

The two could not agree on any economic concept, but one: The US needed a body that could establish some indisputable facts to serve as a basis for economic debate.

Thus, in 1920, the NBER was born, an independent institute that was supposed to bring together the brightest minds from all economic viewpoints in order to reach consensus on pressing issues such as measuring growth rate, employment, or even recessions.

Nearly 60 years later in 1978, this organisation founded the Business Cycle Dating Committee, whose task was to date, with extreme accuracy, the country’s various economic cycles – hence its lag.

“There are often revisions to the GDP, for instance,” said James Poterba, a professor of economics at the Massachusetts Institute of Technology, chairman of the NBER and member of the Business Cycle Dating Committee, to NPR.

“I think that all in all, our US approach to determining the start of a recession works rather well compared to the purely mechanical process” of using only the indicator of two successive quarters of GDP decline, Poterba added.

The UK Office for National Statistics revised GDP growth upwards in 2013, showing there was no recession at the end of 2011, as previously thought.

Lacking transparency and diversity
The committee faces criticism over its structure and lack of transparency, CNN Business said: “They have no predetermined meeting dates and their deliberations are private. There are no fixed term dates and the final determination of who gets to serve on the committee is made by one man,” NBER chairman Poterba.

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“It’s like the ‘fight club’ of economy,” NPR said.

All eight members are from top US universities (Harvard, Princeton or Stanford), and are White and over 60 years old. Moreover, there are only two women, including one who is married to another member.

US Treasury Secretary Janet Yellen, the first woman to serve in the role and as Federal Reserve chair, has argued that the lack of women and minority economists at the Fed and in the government skews viewpoints and limits the scope of discussion.

“It’s incestuous,” Richard Wolff, professor emeritus of economics at the University of Massachusetts, told CNN.

“Fundamental issues that ought to be part of the conversation in our economic system are excluded as if they don’t exist,” said Wolff, who also attended Harvard as an undergrad, received his master’s degree at Stanford and his PhD at Yale, where he was a classmate of Yellen’s. “You have a community of old, White graduates from the same elite institutions and what they think is important is important. If you think differently, you’re out of the club.”

The lack of social and racial diversity has had an impact on the committee’s work. At their last meeting in July 2021, members stated that the last recession – linked to the Covid-19 pandemic – had ended in April 2020. Their reasoning was based primarily on an unemployment rate that had almost returned to pre-pandemic levels. But the poorest Americans and minorities were still far from having regained their lost purchasing power.

“More diversity on the committee will bring in perspectives and other ideas about how we understand the health of the economy,” said Valerie Wilson, the director of the Economic Policy Institute’s Program on Race, Ethnicity, and the Economy, as well as president of the National Economic Association, in an interview with CNN.