The Business Cycle Dating Process (1991)

The 1990 Peak In April 1991, the NBER's Business Cycle Dating Committee determined that a recession had started in July 1990. Figure 1 shows the data that most strongly influenced the committee: real personal income less transfers, real sales in manufacturing and trade, nonagricultural employment (because 1990 was a Census year, the committee looked at private nonagricultural employment, and nonagricultural employment minus Census workers), and industrial production. The figure shows the basic problem of dating a business cycle: that different cyclical indicators have different turning points. In Figure 1, all four series are normalized so that they have a value of 1 in July. Real income peaked in exactly that month. Real sales, a more volatile series, reached a pronounced peak in August. Employment peaked in June. And industrial production peaked in September. The U.S. economy in 1990 reflected the combined influence of two different forces. One was a very broad slowdown starting in the spring. The other was a sharp contraction in industries (automobile and others) following the spike in oil prices in August. The result was an unusual combination of leading employment and lagging industrial production. The July peak date was a reasonable compromise. It embodied the notion that breadth, or dispersion, is an important characteristic of a recession. When measures that span all sectors of the economy--income and employment--peak earlier, the fact that goods production stayed strong for two added months should not control the date of the recession. The 1991 Trough? Figure 1 also shows some of the challenges that will face the NBER Business Cycle Dating Committee in determining the date of the trough in economic activity. First, the figure makes it completely clear that any such determination in the near future would be quite premature. Should the economy begin to contract again, it is a distinct possibility that the trough would occur in late 1991 or 1992. A trough date cannot be assigned until activity has reached a sufficiently high level that a contraction would be a new recession, not a continuation of the existing one. As of October 1991, all four indicators were well below their July 1990 peaks, and one, employment, was hardly above its lowest level, attained in April 1991. If the current pause is nothing more than a pause, and the expansion resumes, the trough date will be sometime in early 1991. Real income reached its bottom in February, real sales in January and again in March, employment in April, and industrial production in March. Comparison with 1981-2 Figure 2 shows the same series in the same format for the last peak-trough combination, July 1981 and November 1982. Note the difference in the vertical scale --the earlier contraction was about twice as deep as the current one. Again, the peak date is a compromise. Real income peaked in August. Real sales were well below their January 1981 level by July. Employment and industrial production both peaked in July. Disagreement among the indicators was much more severe around the trough in November 1982. Real income reached bottom a month earlier, in October. Real sales coincided with the trough date in November. Employment and industrial production lagged by two months. The false trough of January 1982 is a dramatic example of the need to wait until the recovery has reached close to the past peak before identifying a trough. The NBER committee did not declare the trough date until July 1983. …