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Comment: It will be some time before the NBER declares the start of a recession, but the reality is here now

It is the job of the National Bureau of Economic Research (NBER) to date recessions. The NBER has a specific methodology to call the start of a recession. A January 7, 2008 memo on their website says, “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.”

At present, it would be difficult to find anyone that would argue that the US economy is not experiencing the onset of a recession as of March 2020. The hard data hasn’t quite caught up with the anecdotal evidence, but what there is seems definitive.  The sudden and severe rise in jobless claims, the pull back in consumer spending except for essentials to get through stay-at-home orders, the plunge in energy costs, and the collapse of new orders in manufacturing all speak to an abrupt and deep downturn. The record 129 months of expansion probably peaked in February 2020. Former Fed Chair Janet Yellen has said that expansions do not die of old age, and former Fed Chair Ben Bernanke has made the dark joke that expansions do not die of old age, they are murdered. This time it wasn’t poor policy and/or regulation that did in the expansion, but a huge exogenous shock in the form of the COVID-19 pandemic.

Current Fed Chair Jerome Powell has said the shock to the economy is on the order of a natural disaster and not a manmade failure like the financial crisis in 2007-2008. He said there is hope that the recovery will be sooner and more robust than that which followed the Great Recession. But he has also been cautious in that hope with full impacts and duration of the pandemic unknown at this point, and the efficacy of the response still to be determined. In remarks delivered on Thursday, April 9, he said, “This is first and foremost a public health crisis, and the most important response is coming from those on the front lines in hospitals, emergency services, and care facilities.” As such the priority is getting the public health response right and protecting individuals from unnecessary harm. He warned against a “false start” in reopening economic activity too soon.

In any case, the early warning signs of a sustained downturn are all in accord and there is little doubt that the NBER will officially declare a recession. It usually takes the NBER several months to actually make the pronouncement – they have to wait it for the numbers to be fully available. However, whether the recession is eventually technically pegged at the end of the first quarter 2020 or start of the second quarter will make little difference to those living through the effects of the pandemic now.

The advance estimate of first quarter GDP won’t be released until Wednesday, April 29 at 8:30 ET. A fair amount of data in the estimate will be assumptions that will be harder than usual to get a good read on. Coincidently, this is the second day of the FOMC meeting (April 28-29). While the GDP report probably won’t change the tone of the deliberations or any decisions out of the meeting, it will be a hard number by which to describe conditions.

The reason I don’t think the GDP report will have a lot of impact for policymakers is that they will have in hand the latest Beige Book from Wednesday, April 15 at 14:00 ET. The prior Beige Book covered the period from early January through late February, just as the impacts from the pandemic began to bite into activity. The next will cover March and into early April. While the Beige Book is anecdotal evidence about the economy, I have found it to correlate closely with turns in activity. In the last prior report, 10 of 12 Districts reported growth, but the tone suggested that it wasn’t generally more than modest. Two Districts said activity was more-or-less flat. I anticipate a broad weakening in conditions across all Districts and perhaps some sinking into outright contraction where the regional economy is highly dependent on travel and related industries, or those where the declines in energy prices have led to reduced production and layoffs. Districts with a strong manufacturing presence are also going to report widespread declines as orders plunge and nonessential activity is shutdown.

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