NBER Likely to say "Recession Ended" July 2009; Assessing the Real Time Probability US Back in Recession

One problem with the NBER recession dating analysis is that it is months and sometimes years late in making its assessments.

Marcelle Chauvet, professor of economics at the University of California addresses those shortfalls in an interesting article called Real Time Analysis of the U.S. Business Cycle

Although careful deliberations are applied to determine turning points, the NBER procedure cannot be used to monitor business cycles on a current basis. Generally, the committee meets months after a turning point (that is, the beginning or end of an economic recession) has occurred and releases a decision only when there is no doubt regarding the dating. This certainty can be achieved only by examining a substantial amount of ex post revised data. Thus, the NBER dating procedure cannot be used in real time. For example, the NBER announced only in July 2003, twenty months after the fact, that the 2001 recession had ended in November 2001.

Some models, however, can gauge how weak or strong the economy is and date business cycles in real time. In particular, the dynamic factor Markov switching model (DFMS) in Chauvet (1998) has been very successful in dating business cycles in real time and in closely reproducing the NBER dating.

The model yields a monthly indicator of the U.S. business cycles and probabilities of recessions and expansions when applied to the same series used by the NBER: nonagricultural employment, real personal income, real manufacturing and trade sales, and industrial production.

What does the DFMS nonlinear probability model tell us about U.S. recessions?

Since 1959 the U.S. economy has experienced eight recessions. Figure 1 shows the business cycle indicator, and Figure 2 shows the smoothed probabilities of recessions obtained from the DFMS model and the NBER recession dating. The probabilities are obtained using full sample information (that is, all information available from 1959 up to now).

As Figure 2 illustrates, the probabilities increase substantially at the beginning of recessions (peaks) and decrease around the end of the recessions (troughs). Recessions are generally short, lasting on average a year, whereas expansions are much longer, averaging about five years. The 1990s experienced the longest U.S. expansion (ten years) in the past 150 years, while the 2007–09 recession was the longest in the past 50 years.



Current probability of recession

Because of a two-month delay in the availability of the manufacturing and trade sales series, the probabilities of recession are also available only with a two-month delay.

The most recent probability of recession from the DFMS model is for June 2010, which uses information up to September 2010. The probability that the U.S. economy is in a recession in June is 24.7 percent.

The Beginning and End of the 2007-2009 Recession

Inquiring minds are reading the Center for Research on Economic and Financial Cycles article dating The Beginning and End of the 2007-2009 Recession

The Figure shows the real time probabilities of recession from the Dynamic Factor Model with Regime Switching (Chauvet 1998). The probabilities indicate that the U.S. recession started in December 2007.



The NBER only announced that the recession began in December 2007 twelve months later, in December 2008.

Review of the Odds Over Time - To Date

Marcelle Chauvet updates the odds we are currently in recession in his blog
Real Time Probabilities of Recession

U.S. Recession ended in June/July 2009

Probability of Recession in June 2010 INCREASED to 24.7% after being below 10% for the last 7 months and below 50% since July 2009.

2009 January		100.0			-4.4
February		98.7			-2.8
March		96.1			-2.6
April		82.8			-0.9
May		77.2			-1.1
June		66.2			-1.6
July		27.9			0.4
August		21.9			0.4
September		18.6			-0.3
October		11.0			-0.2
November		3.1			1.1
December		2.2			0.8
2010 January		1.4			0.8
February		0.9			0.8
March		0.5			1.3
April		0.8			1.6
May		2.5			1.4
June		24.7			0.2

That is a partial table. Marcelle Chauvet shows the odds starting in October 2007. Notice how the odds the US is currently in recession have risen from 2.5% in May to 24.7% in June.

Odds Higher Today Than June

We will see the odds for August in a couple months. Those odds will be higher than today because of all the recent grim economic data.

Bear in mind Chauvet posts the odds we are already in recession. When the current odds are soaring at an amazing rate (which they are), the odds of a going into recession at a future time, will be much higher.

Some don't see it that way.

Here is a snip is from Bloomberg as discussed in Nonsense from NBER on Odds of Double-Dip

Harvard University Professor Martin Feldstein, who sits on the Business Cycle Dating Committee of the National Bureau of Economic Research says “There’s still a significant risk, maybe one chance in three, that there will be a double dip.” Fellow panel member and Princeton University Professor Mark Watson said those odds are “way too high” and puts them instead at “one in 10 or maybe one in 20.”

Double-dip odds of one-in-10 or one-in-20? When the odds are roughly 1-in-4 we are already in recession as of June?

If Marcelle Chauvet's model is accurate (and assuming the recession is over, her model is the most realistic model I have seen to date), then the above snip was indeed nonsense, not from the NBER per se, but rather from one or two economists who sit on the panel, most notably Princeton University Professor Mark Watson.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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