Note from dshort: This commentary has been revised to include today's release of the Industrial Production data and Wednesday's Retail Sales data, adjusted with the Consumer Price Index, released yesterday.
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."
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: Industrial Production and Real Retail Sales
Since my last update, there have been two data releases for October:
- Retail Sales (the green line in the chart below).
- Industrial Production (the purple line in the chart below).
The Advance Estimate for Retail Sales was released on Tuesday, which I have adjusted for inflation with the October CPI, release yesterday. The October data came in at -0.5% month-over-month after three months of growth. There is some debate over the impact of Hurricane Sandy on retail sales. Sales were definitely reduced when the storm hit, but sales in several categories would have increased in preparation for event. The true impact of Sandy will show in the November Retail Sales data.
The October Industrial Production released this morning came in at -0.4% month-over-month, well below the Briefing.com consensus expectation of 0.1% growth. Again the impact of Sandy in the final days of the month was a factor in the October data, but that would have been factored into the consensus estimates.
Current Assessment and Outlook
At this point, with three of the four indicators for October on the books, the average of the Big Four (the gray line in the chart above) shows us that economic expansion since the last recession has been hovering around a flat line for the past seven months. The data, of course, are subject to revision, so we must view these numbers accordingly. When ECRI's Lakshman Achuthan made his controversial July assertion that these indicators were rolling over and that the economy was already in recession, the data didn't appear to support the claim. But the near-term impact of Sandy on the economy and the economic drag created by congress's inability to deal with the "Fiscal Cliff" issues certainly increase the possibility that the NBER will at some point declare that a recession started in the third or fourth quarter of 2012.
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.
