Happy Anniversary, Economy! (Maybe. Sort of. On Second Thought … )
Imagine that you’re about to celebrate a big anniversary, but start running into unnerving problems.
First, you don’t know exactly when you should celebrate. Or, really, whether you should celebrate at all — and you won’t have a reliable answer for months, maybe years.
Even worse, you’re in no mood to mark the occasion. Nasty issues keep cropping up. They have already killed the buzz for this year’s party — and might ensure that you won’t be celebrating again a year down the road.
That predicament is, more or less, why there may not be revelry for a rare achievement of the United States economy: 10 years of growth without a recession. That has happened only once before, during the long expansion that ended in March 2001. Instead, we are likely to see a sober anniversary, burdened by hypotheticals and gloomy predictions.
With a trade war, simmering income inequality, a disappointing jobs report and shaky markets affecting the mood, this may not be the perfect time to pop the corks. But part of the problem is fundamental: It’s not entirely clear that the economy has set a record, nor is it certain when we will know if it has.
This much can be safely said: “If the United States makes it past July 1 without a recession, the current economic recovery will turn out to have been the longest in American history.”
That careful formulation came from James Poterba, an M.I.T. economics professor. As president of the National Bureau of Economic Research (widely known by its abbreviation, N.B.E.R.), his words are authoritative. The nonprofit research organization is the semiofficial arbiter of recessions and expansions in the United States.
In an interview, Professor Poterba qualified that statement further.
“We won’t know on July 1 that we are not already in a recession,” he said. And even if it turns out that the economy did keep growing through June, we don’t know exactly when the expansion started.
For more detail, I called Robert Hall, the Stanford professor who heads the N.B.E.R.’s Business Cycle Dating Committee, which rules on when recessions start and stop. I said I’d appreciate more clarity, but he said: “We don’t really know the answers.”
First, he said, “The committee’s microscope just isn’t accurate enough for us to pinpoint the actual date of a peak or a trough in the business cycle.” The committee only narrows things down to months. “That’s as precise as we’re comfortable with,” he said.
The closest the N.B.E.R. can come to specifying the end of the last recession is somewhere in June 2009. That imprecision itself is why, even if we were so inclined, we could not mark our calendars for an anniversary party on any specific day.
Then there’s another problem. The N.B.E.R. neither forecasts the future nor reports immediately on the past, he said. “We don’t even attempt to do forecasting,” he said. “We just try to measure what’s already happened. We go as fast as we can. But we take enough time to make sure that we’re right, sometimes a very long time. We’re proud of that.”
For example, the N.B.E.R. didn’t declare that the last recession was underway until December 2008, a year after the economy started to decline. “People made fun of us for that at the time,” Professor Hall said.
Similarly, it wasn’t until September 2010 that the committee was confident enough to declare June 2009 the end of the recession.
Professor Hall explained how the committee operates. The 10 eminent academics on the panel typically meet via conference call when they have something to decide, but Professor Hall said he hadn’t called a meeting “for a very long time.” Between sessions, he said, the members exchange spreadsheets with economic data but haven’t done so “for quite a while now.”
That inactivity suggested to me that the committee doesn’t think a recession is underway or likely to start soon. I asked whether he would confirm that.
“No, unfortunately, I can’t say that,” he said. “Because you never really know about a recession, do you?”
While a recession is often said to consist of two consecutive quarters of declining gross domestic product, the N.B.E.R. embraces more complex definitions.
The core is this: “During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years.”
Discerning these changes takes so long because a cloud of ambiguity makes economic analysis difficult in real time. That opacity sometimes prevents policymakers, financial market participants and journalists from perceiving events accurately.
In December 2007, the start of the recession, for example, The New York Times carried some fairly optimistic — and, ultimately, incorrect — reports about the economy. I was here then. We simply didn’t know which way the economy was going.
One article, for example, reported on Dec. 14, 2007, that Lehman Brothers earnings were better than expected and that the investment bank forecast “that the United States economy will grow 1.8 percent next year and that the global economy will expand 2.7 percent.” In fact, the economy contracted and Lehman itself declared bankruptcy, making matters vastly worse.
And a September 2007 article said that the Federal Reserve began to cut interest rates to stimulate the economy, setting off a stock market rally only two months before the recession’s start.
There is scant evidence that anyone has a clear view of the future now, despite many attempts.
Signals from financial markets are worrisome, but not definitively so. Yields have “inverted,” a reversal of the typical order of things that sometimes, but not always, occurs before a recession. The futures markets predict multiple Federal Reserve interest rate cuts, an indication that traders, at least, think the economy is deeply troubled. A government report on Friday that only 75,000 jobs were created in May heightened those concerns.
James Paulsen, chief investment strategist of the Leuthold Group in Minneapolis, says: Hedge your bets. If a recession is imminent, stock investors will probably endure major losses; if the economy grows, the long bull market is likely to revive. “Basically,” he said, “if the economy doesn’t kill you, it may make you rich.”
Though it may be risky to celebrate the economy now, years of further growth are certainly possible. The N.B.E.R. isn’t ruling that out.
As Professor Poterba observed, Australia hasn’t had a recession since 1991. “That tells us that an economic expansion can last for decades,” he said.