Meet the Street: Sept. 11 Was Crucial to Recession Declaration

Jeff Frankel, who sits on the committee that recently declared the U.S. economy to be in recession, says Sept. 11 was the deciding factor in that declaration.

Jeffrey A. Frankel, Professor, Capital Formation and Growth, Harvard University

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Were it not for the effects of those attacks, says Frankel, the activity that began in March may have just been termed a slowdown rather than an outright recession.

Using a set of four indicators -- industrial production, employment, real income and wholesale-retail trade -- Frankel's group, the Business Cycle Dating Committee of the National Bureau of Economic Research, determined last week that the last business cycle peaked in March of this year and has been declining since.

Though the layman's definition of a recession is two consecutive quarters of negative economic growth, and almost every recession in the past 50 years has been accompanied by such a decline, the NBER prefers to base its calculations on these other indicators, because they are less subject to revision than the GDP data.

TheStreet.com spoke with Frankel, who is also a professor of capital formation and growth at Harvard University's John F. Kennedy School of Government, about the group's methodology, the differences between this recession and recessions past, and the outlook for the next economic expansion, among other things.

TSC: How long has the National Bureau of Economic Research been dating business peaks and troughs, and how did the organization come about?

Frankel: The NBER has existed since 1920, and initially its whole purpose was this: business-cycle economics, of which a lot of it was dating the peaks and troughs. In 1960, it was given official status, in the sense that the Bureau of Economic Analysis of the Department of Commerce, which compiles GDP, said that what the NBER says is a recession is a recession, and they use it for their own purposes.

TSC: And what purposes are those?

Frankel: Some things are probably legally triggered. In terms of policies, often Congress extends employment benefits [such as] the number of weeks you get during a recession, though they don't have to. The fact that we did this might put pressure on Congress to pass the fiscal-stimulus package. But that's not what we see as our purpose. Our purpose is to have everybody agreeing on the same dates.

TSC: On what basis did you determine that the downturn began in March? I know that you tend to concentrate on a set of four indicators -- industrial production, employment, real income, and wholesale-retail trade -- but it sounds like the data were inconclusive. What made March the best month?

Frankel: There's a couple of things. Of the various indicators we looked at, some, at face value, would have indicated that a recession started a year ago -- those are the ones more related to manufacturing, which is not that large a share of the economy. Other indicators, such as the ones related to general income, would have said it began this fall. So one guiding principle is compromise. It's nice to pick a date in between. And in this case, March was particularly obvious because employment peaked, which is probably our most important cyclical indicator. It's available on a monthly basis; it doesn't tend to be revised a lot; and it covers the whole economy, unlike industrial production, which only covers manufacturing.

TSC: The NBER says that the indicators it uses are subject to less revision than the quarterly GDP figures, which some economists use to define recessions. Why are the indicators you use less subject to revision? What makes them more reliable? ...