Dating a Recession

The NBER says the current recession ended over a year ago, in June 2009. This might seem odd: the economy does not appear that great, and voters say the economy is issue # 1, unemployment is high, house equity and sales are low, wages are stagnant, retail sales are flat, and credit is down. How can they say the recession ended?

A current poll shows that people disagree with the economists: 70% of people polled say the recession has not ended. I've heard some angry commentary from people, accusing the NBER of being out-of-touch. However, the NBER's approach is fairly algorithmic. The apparent dichotomy flows from this: the typical economist's concept of a recession is different from the concept of many lay-people.

Economists usually consider the rate of change and turning points to mark a recession, while non-economists tend to think in terms of the level at which the economy is running. Therein lies the mismatch.

Consider this graph, showing a downturn. To an

economist, the recession begins when things start to

turn downward (see the black arrows in the diagram). However, even some months after things have turned downward, the actual level of activity is still quite high (e.g. "things are

better than they were a year ago"), so non-economists do not think of it as a recession. Conversely, when things start to turn upward, the recession has ended if we use the change-based concept of recession; however, we're still down in the dumps, if we use a level-based concept.

The red line in the diagram illustrates a level below which non-economists think: "times are bad". To such "folk on the street", the recession will seem to start later than the NBER says, and end later too. (Grey shaded period versus red-shaded period in the diagram below.)

If there is a double-dip, the two concepts can produce even more divergent viewpoints. Suppose the economy dips again before it comes close to the level that non-economists have come to expect. Economists might count this second dip as a second recession. However, a level-based concept would describe this as a single large recession, as illustrated below.

It is important to understand that the NBER is not saying things will get better. They are evaluating recent history, not projecting the future. The NBER is not saying things are going to improve.Things might well improve, but the NBER is not saying so

Here is a quote from the NBER's release: "In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007."

My focus here has been only to describe the two concepts of recession briefly, in order to explain their key difference. In a future post, I hope to explore the pros and cons of these two concepts of recession.

(Major rewrite: Sep 28, 2010)

Beware of Stoicism

Many are rightly wary of "effortless-success" schemes, but it's also important to be wary of "high-effort success" schemes. Through experience, we often develop a heuristic that puts an extra sheen of value around high-effort schemes, even while we might reject them for their "cost".

Now and then, remind yourself of the person who tries earnestly and hard, while another whizzes past. It ain't the effort alone but the process to which it is applied: a press of a finger can grind something that took my granny 5 minutes of hard labor with the mortar.

Of course we know this intellectually; but I think we need to remind ourselves of it every now and then. Every now and then, one ought to ask: "is this not working because I'm not putting in the required effort, don't have the patience, cheat with some 'indulgence', etc. Or, am I just doing the wrong thing?" Alternatively: "How can I do this in a way that is a little more effective, and yet easier, less costly, does not require fortitude, etc."?

In other words: if you find yourself leaning toward hedonism, and "XYZ in 21 days" schemes... check yourself there. However, equally important, if you find yourself leaning toward stoicism and "How to get XYZ by the time you die" schemes, you might have overdone it!