Note from dshort: This commentary has been revised to include the today's Real Personal Income less Transfer Payments for July.
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 Personal Income (excluding transfer payments)
- Nonfarm Employment
- Real Retail Sales (a more timely substitute for Real Manufacturing and Trade Sales)
The Latest Indicator Data
I've now updated this commentary to include today's release of the July Real Personal Income less Transfer Payments. As the adjacent thumbnail illustrates, final months of 2012 saw some 2013 income pulled forward as a tax-management strategy, which accounts for the atypical peak and subsequent trough in this series. However, we now have enough data points to see the general trend since early 2012 despite the anomaly. PI less TP has been growing at an excruciatingly slow pace. In July Personal Income rose only 0.1%. If we exclude Transfer Payments (Social Security, Unemployment Compensation, Medicare, Medicaid, etc.), it rose 0.08%. If we adjust for inflation using the PCE Price Index, the month-over-month change is a negative 0.01% and a mere 1.8% year-over-year.
The chart and table below illustrate the performance of the Big Four and simple average of the four since the end of the Great Recession. The data points show the percent cumulative percent change from a zero starting point for June 2009. The latest data points are for the 49th month. In addition to the four indicators, I've included an average of the four, which, as we can see, was influenced by the anomaly in the Personal Income data points, which reflect 2012 year-end income increases, at the expense of early 2013, as a tax management strategy.
Current Assessment and Outlook
The overall picture of the US economy remains one of exasperatingly slow recovery from the Great Recession. As we can see in the illustration of the average of the Big Four off its all-time high since 2007, the rate of post-trough growth has been slower since February of 2012, although the end-of-year tax-strategy has obscured overall trend slope over the past 18 months. The flatline today's PI less TP data obviously adds to the frustration.
My next update will be on September 6th when we get the Nonfarm Employment numbers in the August jobs report.
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).
The chart above is an excellent starting point for evaluating the relevance of the four indicators in the context of two very different recessions. In both cases, the bounce in Industrial Production matches the NBER trough while Employment and Personal Incomes lagged in their respective reversals.
As for the start of these two 21st century recessions, the indicator declines are less uniform in their behavior. We can see, however, that Employment and Personal Income were laggards in the declines.
Now let's look at the 1972-1985 period, which included three recessions -- the savage 16-month Oil Embargo recession of 1973-1975 and the double dip of 1980 and 1981-1982 (6-months and 16-months, respectively).
And finally, for sharp-eyed readers who can don't mind squinting at a lot of data, here's a cluttered chart from 1959 to the present. That is the earliest date for which all four indicators are available. The main lesson of this chart is the diverse patterns and volatility across time for these indicators. For example, retail sales and industrial production are far more volatile than employment and income.
History tells us the brief periods of contraction are not uncommon, as we can see in this big picture since 1959, the same chart as the one above, but showing the average of the four rather than the individual indicators.
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The chart clearly illustrates the savagery of the last recession. It was much deeper than the closest contender in this timeframe, the 1973-1975 Oil Embargo recession. While we've yet to set new highs, the trend has collectively been upward, although we have that strange anomaly caused by the late 2012 tax-planning strategy that impacted the Personal Income.
Here is a close-up of the average since 2000.
