Republican partisans’ joy at an estimated 0.6-percent increase in U.S. Gross Domestic Product in the first quarter of 2008 has been diminished by the continued contraction of two key economic indicators used to determine whether a recession has started.  These are non-farm payroll employment (compiled by the Bureau of Labor Statistics), which peaked in December 2007; and industrial production (tracked by the Federal Reserve), which has declined since January 2008.  Payroll employment is the broadest economic indicator, and industrial production measures the physical output of the nation’s factories, mines, and utilities.  Martin Feldstein, chairman of President Reagan’s Council of Economic Advisors, referred to both indicators in a Financial Times column (May 7) arguing that a recession started around the first of the year.  Feldstein’s opinion matters more than those of others practicing the dismal science because he is a member of the National Bureau of Economic Research’s Business Cycle Dating Committee—a seven-person academic panel that analyzes turning points in the economy.  The NBER, founded in 1920, is a Cambridge-based nonprofit, nonpartisan research group.  The committee is considered a neutral arbiter, or umpire, within the profession, and any ruling it makes will be widely cited by the media.

Feldstein characterizes the GDP report touted by Republicans as “very misleading,” because it implies that economic activity was on the rise in the first quarter of 2008.  The increase, Feldstein noted, “actually refers to the rise from the average level in the fourth quarter of 2007 to the average level in the first quarter.  Monthly data since January indicate that economic activity and GDP have been declining since the start of this year.”  Harvard economist Jeffrey Frankel, another umpire, made a similar argument on his weblog on May 12 in a post entitled, “White House Confidence that US is Not in Recession is Misplaced.”  Frankel argues the employment numbers provide “the most important information” about the economy’s status.

One fact not cited by either umpire buttresses their arguments: Job creation has peaked in industry supersectors that account for more than 50 percent of total U.S. employment.  One sector, manufacturing, has contracted since March 1998, a fact well known to Chronicles readers.  The construction (September 2006) and financial-services (December 2006) peaks reflect the now-burst housing bubble.  Trade, transportation, and utilities, now nearly twice the size of manufacturing, peaked (November 2007) with U.S. private employment, as a weak dollar and higher energy costs have contributed to losses in the sector.  A key industrial-production sector—durable consumer goods, which includes automotive—peaked (October 2005) earlier than the overall index.  These data suggest a recession is under way, although it is too soon to determine its duration.  The shortest postwar recession (January to June 1980) lasted only six months, while the longest (November 1973 to March 1975, and July 1981 to November 1982) were each 16 months.  If this recession tracks the postwar average (ten months), a new expansion should start later this year.

Popular media frequently define recession as two consecutive quarters of negative GDP.  The NBER panel relies on more indicators, defining recession as “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.”  These competing definitions, which must seem arcane to laymen, have significant implications in a presidential-election year.  Republicans are likely to cite the first definition if GDP expands at modest rates or alternates between expansion and contraction on a quarter-to-quarter basis.  A positive first-quarter GDP number followed by negative second-quarter and positive third-quarter readings (or vice versa) would muddle the picture until final revised numbers are available—after November.  Prepare for Democrats, who will cite academic proponents of the second definition, to note that GDP has not always declined for two consecutive quarters in recessions identified in the NBER’s business-cycle chronology, which dates to 1854.  It shows recessions occurred from April 1960 to February 1961, and from March to November 2001.  In 1960, GDP contracted in the second and fourth quarters but expanded in the third.  During the last (2001) recession, GDP recorded a similar pattern, contracting in the third quarter of 2000, and in the first and third quarters of 2001, yet expanding in the second and fourth quarters of 2001, according to the Bureau of Economic Analysis.  Expect Democrats to cite every negative monthly employment report and to argue against the popular media myth that the Fed prevents recessions in presidential election years.  The chronology shows recessions in 1960 and 1980 but not, contrary to the claims of Bill Clinton, in 1992.  Democrats retain an advantage in one other sense.  Any decision by the NBER panel about the trough (conclusion) of any recession is not likely to be reached before November 2008.  The state of the U.S. economy may not be the crucial issue deciding the 2008 election, but voters are likely to hear all of these arguments in the coming months.