Is there a recession? Only an under-the-radar group gets to decide

A screen displays the news of the Federal Reserve’s rate change as traders work and watch at the New York Stock Exchange in New York, Wednesday, July 27, 2022. Stocks on Wall Street are solidly higher in afternoon trading Wednesday after the Federal Reserve raised its key interest rate by a widely expected three-quarters of a point as the central bank ratchets up its campaign to quell surging inflation. (AP Photo/Seth Wenig)

(The Hill) – Commerce Department data this week found the U.S. economy shrank for the second quarter in a row, sparking a new debate about whether the nation is in a recession.  

Negative growth in two consecutive quarters fulfills a common definition for a recession — and it’s the official way of making such a call in some countries.  

But it’s not in the U.S., where a relatively under-the-radar group — the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee — is in charge of making an official call on whether the country is in a recession.  

So what is this group, and how does it make its proclamations?

The group within the NBER that actually makes the call on the recession is the Business Cycle Dating Committee.

It has eight members, who are among the foremost economists in the nation, and who all who work at top academic institutions across the country: Robert Hall of Stanford, Robert Gordon of Northwestern, James Poterba of Massachusetts Institute of Technology, Valerie Ramey of the University of California-San Diego, Christina Romer of UC-Berkeley, David Romer of UC-Berkeley, James Stock of Harvard and Mark Watson of Princeton.

Christina Romer served as chairwoman of the council of economic advisers under President Obama, and Poterba is the president of the NBER.

The NBER’s formal definition of a recession is broad. According to its frequently asked questions page, the NBER’s traditional definition is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” 

It considers the depth, diffusion and duration of the decline in economic activity. While the committee’s view is that each “needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.”

Economists say that the NBER looks at many different indicators to make a call on whether the economy is in a recession.

“It actually looks at a wide variety of economic indicators to make that designation,” said Alex Durante, an economist with the Tax Foundation think tank. “They look at employment, personal income, durable goods, housing permits — so the GDP is certainly part of it, but they’re looking at other indicators, as well.” 

Employment is one factor that is crucial in looking at today’s economy. The job market in the U.S. is red hot, even as the Commerce Department has found the economy to have shrunk the last two quarters.

The White House, which has been pushing back on the idea that there is a recession, has pointed out that unemployment is at a historically low rate of 3.6 percent.

The panel did find that a recession occurred in April 2020, after much of the U.S. economy shut down at the start of the coronavirus pandemic. It concluded in July 2021 that the recession had lasted two months — the shortest on record in the nation’s history.

Durante said a pronouncement on the current recession — if indeed it exists — likely won’t come until 2023.

“This is obviously difficult for policymakers who want to stay on top of these conversations, but usually, NBER doesn’t make the designation until after a year,” he said. “That’s because they want to make sure they have enough data, but also because the data tends to be revised.”

Indeed, it is possible the Commerce Department data that found a 0.9 percent contraction of the economy in the second quarter could be revised. It’s a small enough decrease to fit into the typical margin of error by which the department can correct its first-draft predictions.

The origins of the NBER lie in the oil industry.

According to a short history of the NBER written in 1984 by former Vice President of Research Solomon Fabricant, the organization traces its history in part to initiatives made in the early part of the 20th century by the newly formed Rockefeller Foundation, the philanthropic organ built off the vast oil fortune made by John D. Rockefeller.

In 1914, Harvard Business School Dean Edwin Gay “had taken a leading part, at the request of the executive secretary of the newly established Rockefeller Foundation, in preparing a memorandum outlining the organization and functions of an institute for economic research analogous to the already established Rockefeller Institute for Medical Research. The proposed institute would engage in scientific and impartial investigations ‘of such scope as to be beyond the power of our existing university research facilities,’” Fabricant wrote.

Half a century later, the Commerce Department began citing the NBER’s work on the business cycle, which lent it a kind of governmental legitimacy, according to The Washington Post.

But NBER research hasn’t been immune from controversy.

A recent investigation by The Guardian found that Alan Krueger, a former chairman of the White House Council of Economic Advisers, had been paid $100,000 by Uber while writing a paper published under the NBER about Uber that argued it had been a creator of good jobs. Published in 2016 as part of an NBER working paper series, the revelation of the payment attracted academic criticism.

An NBER spokesperson said Krueger’s work as a consultant for Uber was clearly disclosed.

“The cover page of the NBER working paper disclosed the fact that Alan Krueger was working as a consultant for Uber when the paper was written, and that his co-author was an employee and stockholder of Uber. The same acknowledgments were included in the version of the paper that was published, after peer review, by the Industrial and Labor Relations Review,” the statement emailed to The Hill said.

According to its website, the NBER is a research institution that receives money from the government but also makes money from investments.

“NBER research is supported by grants from government agencies or private foundations, by corporation and individual contributions, and by income from the NBER’s investment portfolio,” the website says.

It says the groups that contribute the most to its research projects are the National Institute of Health, the National Science Foundation, the Social Security Administration and the Alfred P. Sloan Foundation.

“The NBER conducts research but does not make policy recommendations or carry out advocacy on the basis of research findings,” the group says of itself. 

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