Note from dshort: This commentary has been revised to include today's release of September Industrial Production and yesterday's Retail Sales, which, with today's CPI release, we can correctly adjust for inflation. Both indicators beat analysts' expectations. We now have the September data for three of the Big Four. The final one, Real Personal Income less Transfer Payments, will be available on October 29th.
Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
- Industrial Production
- Real Income(excluding transfer payments)
- Employment
- Real Retail Sales
The weight of these four in the decision process is sufficient rationale for the St. Louis FRED repository to feature a chart four-pack of these indicators along with the statement that "the charts plot four main economic indicators tracked by the NBER dating committee." In his July 10th Bloomberg TV interview, ECRI's Lakshman Achuthan cites these four in his remarks. He says, and I quote "When you look at those four measures, they are rolling over." On September 13th Achuthan again reappeared on Bloomberg TV and reasserted the ECRI recession call, stating again that the US is already in recession and that future revisions to the data will support their call. See the last 30 seconds of the interview for comments on downward revisions.
Are these indicators really rolling over? First, here are the four as identified in the Federal Reserve Economic Data repository. See the data specifics in the linked PDF file with details on the calculation of two of the indicators.
The FRED charts are excellent. They show us the behavior of the big four indicators currently (the green line) as compared to their best, worst and average behavior across all the recessions in history for the four indicators (which have start dates). Their snapshots extend from 12 months before the June 2009 recession trough to the present.
The Latest Indicator Data
The latest updates to the Big Four was today's release of the September Industrial Production (the purple line in the chart below), which rose 0.4 percent over the previous month following a 1.4 percent decline the month before. Yesterday the Census Bureau's Retail Sales number was released, and with today's release of the Consumer Price Index we can calculate Real Retail Sales (the green line in the chart below). The latest 0.6% increase gives us a strong three-month upward trend after four months of flat or contracting data. Both indicators beat analysts' expectations.
As the average of the Big Four indicates (the gray line), economic expansion since the last recession was flat or contracted during three of the nine months in 2012. The average for August, down 0.3 percent, was the sharpest month-over-month decline of the 2012. The preliminary average for September, with Personal Income yet to be reported, shows definite signs of improvement. The data, of course, are subject to revision, so we must view these numbers accordingly. When ECRI's Achuthan made his July assertion that the indicators were rolling over, the data didn't appear to support the claim. The August data was indeed weak, but September is showing strength, with personal consumption, measured by Real Retail Sales, as the backbone of improvement. Personal Consumption Expenditures accounts for about 70% of GDP (illustrated here).
Background Analysis: The Big Four Indicators and Recessions
The charts above don't show us the individual behavior of the Big Four leading up to the 2007 recession. To achieve that goal, I've plotted the same data using a "percent off high" technique. In other words, I show successive new highs as zero and the cumulative percent declines of months that aren't new highs. The advantage of this approach is that it helps us visualize declines more clearly and to compare the depth of declines for each indicator and across time (e.g., the short 2001 recession versus the Great Recession). Here is my own four-pack showing the indicators with this technique.
Now let's examine the behavior of these indicators across time. The first chart below graphs the period from 2000 to the present, thereby showing us the behavior of the four indicators before and after the two most recent recessions. Rather than having four separate charts, I've created an overlay to help us evaluate the relative behavior of the indicators at the cycle peaks and troughs. (See my note below on recession boundaries).
