When Did the Recession of 2001 Begin? Do We Care?

Greg Mankiw writes:

Greg Mankiw's Blog: Business Cycle Dating: Back in 2004, Michael Mandel of Businessweek gave me grief for saying that the 2001 recession began in late 2000, rather than at the official NBER date of March 2001. My view (and the view of the nonpartisan CEA staff) was that the data were substantially revised after the NBER committee made their call, and the March 2001 date no longer seemed right in light of the revised data. Mandel's view was that I was a Republican stooge.

Recently, a friend emailed me a paper on dating business cycles by the prominent time-series econometrician Jim Hamilton and coauthor Marcelle Chauvet. If you look at their Table 6 (page 53), you can find their estimated date for the start of the recession: September 2000.... I am happy to welcome Jim Hamilton into the Republican stooge club.

Menzie Chinn comments:

Econbrowser: The 2001 recession revisited: In a recent post, Greg Mankiw cites Hamilton and Chauvet in support of his view that a good argument could be made that the recession of 2001 actually began in 2000.... As some readers may recall, the 2004 Economic Report of the President contained this box, which states:

The National Bureau of Economic Research (NBER) uses a variety of economic data to determine the dates of business-cycle peaks and troughs.... [T]he four data series that the NBER used to determine the timing of the recession have been revised.... Real personal income less transfers... peaked in October 2000. Nonfarm payroll employment... peaked in February 2001. Industrial production['s] peak came even earlier, in June 2000. Manufacturing and trade sales... the most recent data show a peak in June 2000.... [M]onthly GDP reached a high point in February 2001....

The median date of the peak for the five series discussed here is October 2000....

First let me make the observation that while Mankiw prefers the multivariate Markov Switching results in Table 6 of Hamilton-Chauvet, it is by no means the only set of estimates in the paper. Table 8, using the recursive estimation methodology indicates a March 2001 recession date....

I refer first to what the NBER Business Cycle Committee states are the variables of importance....

Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee views real GDP as the single best measure of aggregate economic activity.... The traditional role of the committee is to maintain a monthly chronology, however, and the BEA's real GDP estimates are only available quarterly. For this reason, the committee refers to a variety of monthly indicators to determine the months of peaks and troughs.

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, the committee refers to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. The committee also looks at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process....

So, while I think reasonable people can disagree on the starting point, for me, a revisiting of the data tells me the recession of 2001 took place in... 2001.

Comments

[anne]

When the last recession began has an importance in measuring how long a time passed before the economy was slowed to a decline by the Federal Reserve tightening on 1999-2000. The Fed ended tightening in May 2000, with a 1/2 point short term interest rate increase, but the long term interest rates had already begun to decline in February 2000. The final Fed tightening was likely too much in light of the decline of long term rates for 4 months, and in light of a faltering stock market. By December 2000, there was a pronounced bull market in bonds and a clear economic problem, clear enough for the Fed to begin 2001 with an immediate lowering of short term rates.

The response of the economy to the Fed tightening was quick and pronounced, and that leads me to hope the Fed is done now for we again have declining long term interest rates and economic slowing is easily noticed.

[anne]

http://flagship2.vanguard.com/VGApp/hnw/FundsByName

Vanguard Fund Returns
12/31/05 to 8/18/06

S&P Index is 5.5
Large Cap Growth Index is -0.2
Large Cap Value Index is 10.8

Mid Cap Index is 3.7

Small Cap Index is 4.9
Small Cap Value Index is 8.0

Europe Index is 18.3
Pacific Index is 6.3
Emerging Markets Index is 11.0

Energy is 16.3
Health Care is 7.9
Precious Metals is 25.3
REIT Index is 18.2

High Yield Corporate Bond Fund is 2.9
Long Term Corporate Bond Fund is -1.7

[anne]

A long term Treasury interest rate of 4.84%, tells us that institutional investors have no worry about a persisting inflation problem. The economy is weakening, at the least moderately, and the question now is will the decline in long term rates allow for an easing of mortgages that will continue moderate home sales and spur vehicle sales. Though the general real estate market remains strong, housing has weakened and home improvement may become a problem. Weaker vehicle sales in turn could lead to further economic slowing. The question is whether the Federal Reserve has stopped tightening in time.

[RT]

ISTM that this argument is about different things for different people. My question is, once we're in a recession, how soon should the Mankiws of the world know that we're either in one, or at least likely to soon be in one?

Because I remember quite clearly the selling of the 2001 tax cut: the boom's gonna go on forever, we'll pay off the entire national debt, and then pile up far too much money in the Treasury, so we should give some of this money back to the people NOW.

If Mankiw asserts now that we were already in a recession in the fall of 2000, my question is, should he have known by the spring of 2001 that we were probably sliding into a recession, and if so, wasn't it his duty to say a few discouraging words about Bush's tax cut?

[save the rustbelt]

What is really important is that a large segment of the country never left the 2001 recession, and another one is roaring in.

But then I'm not smart enough to see the wisdom of destroying a wide swath of the American economy so China and Wall Street can be more prosperous.

[dan]

You can throw out the bond market as a gauge of inflationary expectations. 70 percent of the bonds are now held by the monetary authorities in the US and abroad. The Asian central banks and the Federal Reserve are more interested in affecting consumer behavior in the US than they are of expecting a reasonable return.

[me]

Hey Mankiw,

The question isn't when it started but when it is going to end for most of us? Under Clinton, more jobs were created in a year than you and Bush have created in 5 years, unless of course, we count all the offshored jobs.

[anne]

The idea that the bond market no longer reflects the relative health of the economy because of international holdings of bonds is foolishly in error. The idea that China is responsible or to blame for American economic weakness is even more foolish.

[anne]

The point that there are communities that entered recession in 2001 and have not recovered is important and compelling, but rather than look beyond us we must look especially to fiscal policy for answers. My sense is look to the New Deal, and ask what might have been done and might yet be done to generate development and fair employment in impacted communities. There is our weakness.

Yes; I have been terribly against the war in and occupation of Iraq, but beyond my pacifism think of what might have been done for American development with the 10 billion dollars a month we have tragically spend on Iraq.

[anne]

We must not assume the problem is China or India or Germany or France. Look to the development and employment success in Sweden and Australia, and think back to the New Deal and learn of the New Deal and what development in America might be again.

[Bruce Wilder]

Arguing with Greg Mankiw, well-known Republican stooge, about when the recession began or ended is silly. (My recollection is that it was rather obvious that the bursting of the bubble made it certain we were heading into recession; Sept or Oct looks better in the data than March, to my eyes.)

The deep problems with the economic choices of the Bush Administration have to do with the consequences of borrowing huge sums and then "investing" them in the black hole of Iraq, and the dry hole of suburban housing no one can afford to drive to.

Bush has given us declining median wages and record corporate profits. He's delivered for his base, but most of us are poorer for it. Face the fact that Mankiw is enthusiastic about the policy choices that got Bush the results they both wanted.

[anne]

Benjamin Friedman mentioned not long ago that these 5 years of declining real median wages have not been experienced since the New Deal, and this through a time of generally record or near record corporate profits. Another year of declining real median wages will almost surely be recorded. We have a seriously distorted growth problem, but remember we are growing and we are not looking at the New Deal as a model.

[anne]

With Brad DeLong, I suggest that Benjamin Friedman be considered carefully just now. We need to freshly think to the New Deal:

http://www.harvardmagazine.com/on-line/010678.html

January, 2006

An Economist's Take On the Moral Consequences Of Material Progress
By J. Bradfold Delong

The Moral Consequences of Economic Growth
By Benjamin M. Friedman

Economists have always been very good at detailing the material consequences of modern economic growth. It makes us taller: we are perhaps seven inches taller than our preindustrial ancestors. It makes us healthier: babies today have life expectancies in the seventies, not the twenties (and more than half that improvement is not directly related to better medical technology, narrowly defined). It provides us with leisure: eight-hour workdays (rather than "Man's work is from sun to sun, and woman's work is never done.") It provides us with enough clothing that we are not cold, enough shelter that we are not wet, and enough food that we are not hungry. It provides us with amusements and diversions, so that there is more to do in the evenings than huddle around the village campfire and listen yet again to that blind poet from the other side of the Aegean tell the only long story he knows—the one about Achilles and Agamemnon. As time passes, what were luxuries become, first, conveniences, and then necessities; what were utopian dreams become first luxuries and then conveniences; and what was unimagined even in wild fantasy becomes first utopian dreams and then luxuries....

[anne]

The related perspective of Joseph Stiglitz:

http://www.foreignaffairs.org/20051101fareviewessay84612/joseph-e-stiglitz/the-ethical-economist.html?mode=print

December, 2005

The Ethical Economist
By Joseph E. Stiglitz - Foreign Affairs

The Moral Consequences of Economic Growth
By Benjamin M. Friedman

GROWTH MAY BE EVERYTHING, BUT IT'S NOT THE ONLY THING

Economists have long been a natural constituency in favor of growth. Since even the richest country has limited resources, the central economic problem is choice: Shall we fund tax cuts for the rich or investment in infrastructure and research and development, war in Iraq or assistance for the poor in developing countries and our own? By providing more total resources, growth should, in theory, make these choices less painful.

The United States, however, has powerfully demonstrated that while growth increases supply, it also raises aspirations. Choices that rich countries have to make thus seem to be no easier than those confronting poor countries, even though the tradeoffs are more heart-wrenching in the case of the poor. Brazil, for example, must choose whether to use its limited health budget to pay full-market price for AIDS drugs; some AIDS victims may live as a result, but people in need of other health care will die, because money that could have been spent on their needs is simply not there. More growth-provided resources, in this instance, mean the difference between life and death....

[Robert Waldmann]

Reminds me of the best abstract in the history of economics. Paper Title

"Unit Roots in GNP: Do we Know and Should we Care"

Abstract: No and probably not.
authors (sue me for forgetting your names).

I think we can agree that an economic downturn was inevitable by Jan 20 2001 and indeed by November 2 2000 so it was not George Bush's fault. We can also agree that the concept of "the date a recession began" is a bit metaphysical and debate is silly.

Most importantly I think that we can all agree that the CEA has no business talking about business cycle timing. The issue is politically important and can't be made mechanical so it is essential that political appointees not be allowed to participate in the debate. This is not because the question is really important and has nothing to do with the integrity of this or that political appointee.

There are many equally useful ways of timing business cycles. There is one way which is much worse than all the others which is to allow politicians to decide dates so as to blame other politicians. Even if Mankiw had good reason to think that the recession began in 2000, out of respect for the valuable principle of non-partisan business cycle timing, he should have kept his mouth shut so long as he was CEA chairman.

[a different chris]

I don't know why this is so important to him. He wants to make some defense of Bush II??

Well, then Dr. Mankiw has to explain in exactly under what sort of economic conditions Bush's so-called fiscal policy would have made sense, what did people at the time think the economic conditions were, and what does hindsight tell us that they were.

I doubt he has the stomach for it.

But the ack-ack fire method of defense is getting rather annoying.

[pgl]

My view is that all those promises of "do more for you" and a tax cut too being made by BOTH Bush & Gore combined with a monetary policy that was a tad too tight contributed to the decline in stock valuations which did occur before Bush took office. My view is one of rational expectations where folks anticipated the insane fiscal policies of the Bush Administration. So he is at fault? I guess one can argue it was not a certaintity that Bush would beat Gore (and perhaps he actually didn't) so the fault also goes to how Gore ran his campaign with promises to be fiscally insane too. Robert Rubin has argued Gore would have maintained fiscal sanity, which raises the question as to why he made such insane promises. And this goes to how Kerry ran his campaign in 2004. Roger Altman and Gene Sperling may have been heroes in the Clinton Administration but they should reign in the campaign statements of the candidates they work for.

[Mike]

What's it take to be a 'non-partisan' member of the CEA staff?

"[Mankiw's] view (and the view of the nonpartisan CEA staff)" echoes the GOP talking points. Is there really a non-partisan CEA staff-view?

[dWj]

Unless I misunderstand -- and I'm willing to concede that it's quite possible I do -- table 8 in that paper is explicitly based on the old data. The reason it comes up with the same date as the NBER did is because both use the same bad data. The conclusion would seem to be that in the real world the recession started in 2000, while in a world that never existed it started in 2001. Perhaps with these extra qualifications as to what we specifically mean we can come to a consensus on this.

In the 2004 ERP, as I recall, the relevant discussion was about various economic indicators, and how they had performed a given number of months after the start of each of the past few recessions. I remember being struck by the fact that the most recent recession would have just looked really weird if they had tried to use the NBER date; it would, in fact, have looked as though the most recent values for the indicators had been shifted by about five months. And perhaps that's really the important point; when you date recessions as beginning may depend on what it is you're doing with these dates. In this context, Mankiw et al seem to have used the most appropriate date for what they were doing with the data.