- [Narrator] The economy is in a confusing place right now,
and there's a lot of speculation around this one word.
- The latest sign that we may be headed for a recession.
- Are we actually in a recession?
- I do not think the US is currently in a recession.
- [Narrator] So what actually determines
when the US enters a recession?
It's not this or this or this.
No one chart determines a recession.
Rather it's these eight people,
a group known as the Business Cycle Dating Committee.
Here's how this group decides
when the US is in a recession and why knowing that date
is so important.
(gentle music)
- It matters if you're gonna lose your job.
It matters if your income is going down.
It matters to business
if they're gonna be selling fewer cars or fewer televisions.
So our entire economy is oriented towards producing more,
and a recession is when everything goes wrong
and we go in the other direction.
- [Narrator] Knowing when a recession starts and ends
is important, because it can inform how we respond
to these downturns later.
This group of economists is selected by the NBER,
or National Bureau of Economic Research.
Each member on the committee is an expert,
in well, business cycle dating.
Business cycles are patterns of peaks, or high points,
and troughs, low points, in economic activity.
That period between a peak and a trough is a recession.
The NBER has been dating business cycles
back to at least the 1920s,
but formalized the committee in 1978.
The committee is nonpartisan
and its makeup doesn't follow set guidelines.
The number of people on it can vary,
and some have been there since its inception.
It's included people like former Fed Chairman,
Ben Bernanke.
- Thank you.
- What they try to do is seek balance
in a really even handed, data only approach
to just looking at the data and what they show
and put the politics out of it.
- [Narrator] The committee doesn't meet regularly,
only when economic data looks like it might be reaching
a peak or trough.
So what are the data they're actually looking at?
The NBER officially defines a recession
as a decline in economic activity
that's spread across the economy
and lasts more than a few months.
To track that economic activity,
the committee looks at several indicators,
income, employment, real sales,
personal consumption expenditures,
or the value of stuff bought by people in the US,
and industrial production.
- What they try to do is they try to look at
broad indicators that measure all of the economy at once.
- [Narrator] Across these categories,
they're looking for three things,
depth, which is how far indicators are declining,
diffusion, which is how far the decline has spread
across the economy, and duration,
which is how long those declines last.
If each shows deep declines lasting a long time,
that would mark a clear start to a recession.
Just take a look at 2007,
when all of these categories saw a significant drop
after December, but it's not always so clear cut.
- The economy is this dynamic organism,
and it doesn't always behave according to the textbooks
or the conventions about how we think it should behave.
- [Narrator] The time that each indicator peaks
can vary widely.
This chart shows how many months before or after
a recession start date that some of these reached a peak.
For example, in 1980, sales started to decline
10 months ahead of the committee's economic peak.
Or look at 2020,
when the committee called a recession
at the start of the COVID 19 pandemic,
even though the downturn had only lasted two months
James Poterba, the president of the NBER
explained the reasoning on CNBC,
when the start of the recession was initially declared.
- The depth of this downturn is such that
the committee felt comfortable labeling that as a recession.
- Yet, the thing with these economists
is they wanna be scientific
but there's some art to this too.
There's some kind of just like feeling around a problem
and just saying, we gotta make our best call.
- [Narrator] This method of calling a recession
isn't standard.
Many analysts and commentators across the globe look at GDP,
or gross domestic product,
for guidance on when a recession has started.
GDP is a measure of how much goods and services
and nation produces.
The common rule of thumb is that anytime it declines
in two consecutive quarters, that indicates a recession.
You can see that was the case in 1990,
but again, this data alone isn't enough because...
- The challenge with that is that how much stuff we produce
as an economy doesn't tell the whole story,
it only tells part of this story.
- If you look at 2022, GDP did drop in these two quarters,
but employment,
a key indicator for the committee was still strong.
So the NBER didn't call it a recession,
at least it hasn't yet.
That's because the committee
usually doesn't call a recession for months down the line.
Just look at the start of the 2008 recession,
which the committee didn't make
an official announcement about for a year.
- The fact of the matter is a lot of these data
that they're looking at are revised
months or years down the road.
And so when they make these declarations,
they wanna be on firm ground,
they don't want to be revising the dates
that they put out there as often as the data are revised.
So they tend to act with a little bit of a lag.
- [Narrator] So when the committee does make a call,
it doesn't often have that much effect
on the current economic situation.
Still, knowing the precise time a recession has started
is important politically
- When someone is running for president or reelection,
people make judgments about whether that person
has done a good job in office.
And so we look at whether there was a recession
- [Narrator] And it's also important economically.
- By having that sharpened view,
they could kind of do some analysis of,
well, what were interest rates doing around then?
What was inflation doing?
What were jobs doing?
So by sharpening your view of the past,
the hope is you can make better judgements
about the present.
- [Narrator] Though the committee hasn't yet determined
if the US has entered a recession,
economists in a WSJ survey
think we're likely headed into one this year
- During and after the COVID shock,
there's just been a lot of turbulence in this economy
and so we have indicators going up and down,
in different divergent directions
that make it very hard to read
how the economy is behaving right now.
- [Narrator] And since the committee is backward looking,
there isn't a clear timeline on when or if
an announcement could come.
(gentle music)