Markets and the media seemed to largely dismiss last week’s NBER Business Cycle Dating Committee announcement that they cannot yet declare the recession tough. The Committee’s decisions, however, is important for two reasons. First, of course, the trough only marks a turning point whereby growth of any dimension follows. Second, while the dating of troughs typically occurs with a lag, that lag seems to be greater in recent years. Nonetheless, we are now entering the zone of uncertainty, where applying even the longest recovery announcement lags extends the recession beyond those of recent history.
Typically, business cycle announcements lag their turning points. For instance, since 1980, the minimum lag for announcing NBER recession dates (peaks) was six months (1980, 1982), the maximum eight months (2001). (Prior to 1979, there were no formal announcements of business cycle turning points.) The current recession was announced twelve months after its onset in December 2007, the longest lag in modern history. The lag, of course, is largely due to the vexing nature of the financial crisis, which will most likely cause a deeper and more persistent recession that others in recent history.
Of more interest for our purposes, trough announcements lag considerably, as well. Since 1980, the minimum time to announce a trough was ten months (1983) and the maximum was about 20 months (1991, 2001).
So what does all of this mean for the present recession? The last two recessions lasted roughly eight months. The present recession was announced in December 2007. That means that even if the maximum lag for announcing the trough is applied, the trough would have been reached in August 2008 and we would have our standard eight-month recession.
The point is that we are now entering the zone of uncertainty, where applying even the longest recovery announcement lags extends the recession beyond those of recent history. As a result, it may be too soon to discuss exit strategy for many of the stimulus programs.
The NBER decision illustrates that there is currently no certainty about where we are at in the cycle. If there is one lesson that seems readily apparent from the 1930s, it is that taking the patient off life support too early can lead to another heart attack. Many analysts suggest that the policy mistakes of 1936-7 are the best reference point to the immediate present, but perhaps the analog is 1931, a period of calm before further calamity. The current economy still faces exceptionally high unemployment, a banking system that is hampered by new bank failures every week, trillions of dollars of bank assets in resolution, and shaky sovereign borrowers seeking lines of support from more solvent countries. Both the economy and the financial system remain in critical condition.
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