SYLVIE DOUGLIS, BYLINE: This is PLANET MONEY from NPR.
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MARY CHILDS, HOST:
We are in a really weird economic moment. On the one hand, unemployment is basically at a half-century low. The labor market is incredibly strong. And on the other hand, we have the highest inflation in 40 years. The Federal Reserve just decided to hike interest rates by the most in almost three decades, which is helping to cool the overheating housing market, all of which has helped financial markets to start vomiting. And then we learned that gross domestic product declined at an annualized rate of 1.5% in the first quarter of this year.
GREG ROSALSKY, HOST:
So you might suddenly be hearing from us and others that there's this growing risk of a recession. Some are arguing that we're already in a recession. It can get pretty contentious and kind of political.
CHILDS: But officially, there are only eight people in the country whose opinions on this matter, who formally make the determination. Are we in a recession?
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CHILDS: Hello, and welcome to PLANET MONEY. I'm Mary Childs.
ROSALSKY: And I'm Greg Rosalsky. Today on the show, who are these eight people who diagnose what's going on in the economy? How do they do it? What are the actual things that tell you a recession is happening?
CHILDS: To find out, we go to the people whose opinions have mattered. We talk to members of the one, the only National Bureau of Economic Research Business Cycle Dating Committee.
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CHILDS: So a recession is a decline in economic activity, any period of more than a few months in which the economy is shrinking. The common shorthand people use is two consecutive quarters of declining gross domestic product, a decline in the sum total of all the goods and services produced broadly across the economy, which - that seems so easy. Like, can't we just have an automatic rule where if it's two quarters, check, it's a recession?
ROSALSKY: So like, seriously, why do we have this whole committee dedicated to making what seems like an obvious objective call? We had a lot of questions.
CHILDS: Who decides who's on the committee?
JIM POTERBA: The president of the NBER makes that decision. So in some sense, I think the answer is me.
ROSALSKY: That's Jim Poterba. He's an economics professor at MIT, and he's been the president of the National Bureau of Economic Research since 2008. So he kind of seemed like the perfect person to ask why we need a committee.
CHILDS: Do you think this is the optimal way to label a recession?
POTERBA: You know, I think it's a strategy that works reasonably well. And I think that the alternative would be some purely mechanical strategy along the lines of the two quarters of negative GDP growth definition. And I'm pretty sure that the committee can always look at all of the information that any mechanical rule would use, but it also can bring to bear the human judgment element of if something unusual is happening that might not fit the usual playbook. It brings that judgment element in.
CHILDS: I like your point that we have the tools and resources to be mechanical.
POTERBA: I would say the committee knows - if GDP has declined for two consecutive quarters, the committee is aware of that.
ROSALSKY: So having a committee is kind of both. It's both an automatic two-quarter rule or a few months rule plus the benefit of human judgment on top. And sometimes human judgment is really needed. For example, in 2020, the downturn at the start of the pandemic - that lasted two months. And a computer, if it were just following a simple rule, wouldn't have caught it.
CHILDS: OK, next question, and we've been hearing a lot of people talk about this. We've had one quarter of negative GDP growth. Maybe we're already in a recession. Jim hears that chatter, too - people being like, where's the NBER on this? Why aren't they calling it?
POTERBA: To be very clear - right? - the committee is not trying to make a real-time determination of are we in a recession at the moment, right? That is in no way, shape or form what the committee is convened to do. And, you know, I will certainly read popular accounts that say, why has the NBER not called a decline? And we're waiting until the data settle down and we have high confidence to be able to make these turning point calls with very little concern about doing this in real time.
ROSALSKY: Because the committee doesn't really care about tomorrow. It doesn't even really care about today. The committee only cares about the past. So they take their time. For example, they decided that the Great Recession ended in June 2009, which they announced in September 2010, 15 months later.
CHILDS: I wanted to understand what it felt like to be in the room. I wanted to be able to picture it in my head, feel like I was there. So I asked Jim, do you eat sushi? Are you wearing a suit? Is it the morning? What kind of conversations do you have? Like, do they ever get heated?
POTERBA: It - I mean, like, really, the answer is no because there's not much there.
CHILDS: No, come on. Tell me like I'm an alien. I've literally never seen a professor.
POTERBA: No, I mean, to be honest, no. It's not that there's anything I'm shielding from you but, you know, we do have a rule of the committee that we do not discuss the committee's deliberations.
POTERBA: So...
CHILDS: It's like "Fight Club."
POTERBA: ...I'm afraid I just can't go there for you.
CHILDS: Jim also would not tell me how the committee watches the economy, how they talk about it. He says they say what they think on their website. OK, fine, I get it. But you know who can tell me more is someone who isn't on the committee anymore. So we went through the list of people who have ever been on the National Bureau of Economic Research Business Cycle Dating Committee. And it's a shockingly short list. The committee has only been around formally since 1978. It was kind of a looser thing before that. So the list of past members is just nine people. And of the nine, only four are still living.
ROSALSKY: One of those former members made time to talk. His name is Ben Friedman, and he's an economics professor at Harvard.
CHILDS: Everyone chattering about a recession right now - does that annoy you?
BEN FRIEDMAN: No, I think this is...
CHILDS: One of the people who used to - OK.
FRIEDMAN: I mean, for goodness sake, we're talking about something that's very important for the lives of hundreds of millions of citizens, and so it would be even more upsetting if nobody were paying attention.
ROSALSKY: Ben made a few more arguments as to why a human committee is better than a mechanical rule.
FRIEDMAN: If you had a question about your personal physical health, for example, and you went to the doctor, and the doctor said, well, Mary, we have taken your temperature, and your temperature is 98 point whatever, and that's the only thing it's worth looking at, I'm guessing you'd get another doctor very quickly.
CHILDS: I would indeed.
FRIEDMAN: That just doesn't make any sense. And similarly, we are fortunate to have many, many measures of economic activity - some at a broad level like industrial activity, some at a very refined level like railcar loadings, shipments. The list goes on and on and on.
ROSALSKY: So one reason why there's a committee - GDP is just so incomplete as a litmus test. There are just so many indicators of economic activity. And the second reason...
FRIEDMAN: GDP growth is often revised after the fact - sometimes a year later, sometimes five years later, sometimes 10 or 15 years later.
ROSALSKY: For example, initially, the fourth quarter of 2008, the Great Recession. At the time, it looked like GDP had contracted at an annual rate of almost 4%. But years later, they looked back at the data with more full information. And the contraction, it turned out, was actually twice as bad as it seemed at the time.
CHILDS: So not only is GDP inadequate, it might also become wrong. If you just used the mechanical way to call a recession, you'd maybe end up with a chaotic measure that changes all the time. This is why the committee says they don't care about today or tomorrow. They need time for the data to settle out. And they need human judgment to balance the messiness of reality. They need to be able to talk it out in a room.
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CHILDS: A room that I am still dying to know more about. Like, is it mahogany paneling? Are they wearing suits or not? Have committee members ever cried inside this room? We get more answers after the break.
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CHILDS: So we now know why the two-quarter GDP rule is not actually the rule. And I couldn't get answers on what it's like in a meeting of the National Bureau of Economic Research Business Cycle Dating Committee from the current member due to the first rule of the Business Cycle Dating Committee, which is that you don't talk about the Business Cycle Dating Committee. So I asked Ben Friedman, the former member, some of my many questions, like how often did you meet? Did you meet all the time?
FRIEDMAN: We didn't have routine meetings just for the sake of getting together for 10 minutes and everybody nods around the table and says, yes, yes, yes. The economy's continuing to grow. No reason to say there's a recession. Bye-bye. See you next week. That's not what people did. And it wouldn't have been until the next suggestion of a downturn.
ROSALSKY: The next suggestion of a downturn - that's the catalyst for the meetings, when the economic data starts to get a little funky and people are like, I think a recession is coming or I think the recession is over, generally, the request to convene comes from the chair of the committee, who, in fact, has been the same dude since the group's creation back in 1978. His name is Robert Hall. He's a professor of economics at Stanford. Though Ben says the chair convening the committee - that wasn't a hard and fast rule.
FRIEDMAN: At least in my day on the committee, if it had been the case that I thought there had been a major downturn and I hadn't heard from anybody about a committee meeting, I could perfectly well have picked up the phone and called the chairman and say, well, don't you think we ought to meet?
CHILDS: Also, Ben says they see each other all the time. They see each other at economic conferences, around town in Cambridge, at the grocery. And this is just the normal stuff they talk about anyway. The state of the economy is just going to come up. So by the time they meet, they're generally already on the same page. So Ben did answer some of my many questions about the logistics, and my impression is generally, the chair convenes a meeting. They all gather. Ben says they generally wear whatever they're going to wear to go teach their next class. In his day, that was a suit and tie. Today, that's more like sweaters and slacks.
I also got answers on my somewhat more substantive economic questions. On their website, the committee says they have a little formal checklist - three qualifications that a downturn must satisfy to be a recession. Those are depth, diffusion and duration - the three D's of doom, if you will - how severe, how widespread, and how long. Every recession will be heavier on one more than the other, but they all have to meet each to some degree.
ROSALSKY: On their website, they describe the variables. They look at personal income, a couple employment measures, consumption numbers, wholesale retail sales and industrial production. But Ben says they don't like to pick a favorite, in part because every recession is a little different. So every time the committee gathers, different things are going to matter more.
FRIEDMAN: We would look especially at those sectors of economic activity that are primarily the volatile sectors, like a bit what was happening in homebuilding, automobile purchases, business investment in new equipment and new - beginning new factories. We would have looked not just at the actual spending, but at the indications that are very useful that we get that spending is about to take place.
CHILDS: Like in real estate. Residential construction is one of the most volatile parts of the economy, Ben says. People only start to build new houses when money is flowing and they feel optimistic about finishing building those houses and moving into them. So the Business Cycle Dating Committee monitors new home construction - how many new houses were started in the past month, how many permits people got to start construction soon, and how many homes are about to be finished, which Ben says is an extra good one.
FRIEDMAN: That's when people spend on sofas and refrigerators and carpeting and so forth, so...
CHILDS: Yeah.
FRIEDMAN: These are all ways of getting a sense of the momentum of what the economy is doing.
ROSALSKY: So they're in the room, and they're looking at flat lines and sharp vertical lines and squiggly lines and - I don't know - rhombuses and isosceles triangles. They then talk, and they come to an agreement.
CHILDS: How long do these meetings typically take? Is this, like, a full-day thing?
FRIEDMAN: I don't remember any full-day meetings. I remember meetings that might have been a full morning or something like that.
CHILDS: Do you get snacks?
FRIEDMAN: (Laughter) I've - the NBER has a small kitchen and a - so I suppose anybody who wants to walk around the corner to the kitchen would have been very welcome to do that.
CHILDS: Is it ever contentious? Have you gotten in fights about it? Or has anyone ever cried?
FRIEDMAN: Yeah. In my service on the committee, I would not describe any meeting as contentious. There are questions that arise about which reasonable people can have one view or the other.
CHILDS: The only time it can get a little heated, or, like, this conversation's version of heated, which still sounds pretty cool...
FRIEDMAN: There is still some real economic substance in deciding, well, did that recession begin in February? Was it perhaps in March? Was it not quite until April?
CHILDS: So this is where things are more subjective and people have different opinions more often?
FRIEDMAN: Well, yes? Yes, I would say that's right. And also, there's the subtlety in which some people use monthly economic data and other people use quarterly economic data.
ROSALSKY: This is actually a big thing. Like, everyone talks about the definition of a recession as two quarters of declining GDP. But that's not quite right, according to the official committee. They say it's more than a few months, which usually translates into two quarters, but not always.
CHILDS: Say it's clear from the data that a recession began in March of a given year. Economic activity peaked in February and then declined in March. March is the last month of the first quarter. But whether quarterly GDP is positive or negative will depend on the magnitudes. If March was bad, but not enough to eat all of January and February gains, then you have an awkward problem. Someone measuring on a monthly basis would say, yeah, the recession started in March in the first quarter. But someone thinking on a quarterly basis would say, no, you are wrong. The recession began in the second quarter. This is the stuff of business cycle dating drama.
ROSALSKY: But despite the huge potential for drama, they have a goal that they're trying to get to.
CHILDS: Do you, like, take a vote? Or is it just someone's taking notes and writing down the end of the conversation? How do you know?
FRIEDMAN: I think I recall that we did take votes. But again, you don't take a vote until you've reached a consensus.
CHILDS: So it's kind of like a - like, OK, we're all good here? We're all - like, that kind of vote instead of a...
FRIEDMAN: Yeah, I think so.
CHILDS: OK.
FRIEDMAN: I think so.
CHILDS: So you're not going to come up with, like, a 4-5 split?
POTERBA: Oh, no, no, no, no, no.
CHILDS: Yeah. OK (laughter).
FRIEDMAN: If you have a split, then your job isn't done. Then you work harder.
ROSALSKY: So they're not in a rush. The whole point of demarcating a recession is to agree, to establish the facts, the start and the stop.
CHILDS: This is also the motivation behind the creation of the entire NBER back in 1920. People on opposite ends of the political spectrum, a labor socialist and an executive at AT&T, decided they needed to agree on some basic facts, a shared starting point, so that they could have productive conversations and actually learn things and make progress.
FRIEDMAN: We want researchers who are using the data to be in sync.
CHILDS: It's more just so we're all speaking a common language, whereas otherwise it might be, like, kind of babble, where we're all just...
FRIEDMAN: I think your notion of a common language is a very good analogy. We're using a word, recession, and we want to make sure that we all - at least looking backward - we all are using the word in the same way.
CHILDS: The common language is the foundation for research. And research helps us make smarter, more informed policy decisions in the future. But there is a tension here. Policy needs information fast, which is not what the committee does. So, for example, in 2020, the committee gathered right away, in June, because the data were already so compelling. Here's current member Jim Poterba.
POTERBA: No one needed the NBER to tell them in June of 2020 that the U.S. economy had declined over the last few months. And what was really unusual about 2020 was that, you know, the economy had moved so far so quickly that the risk that data revisions would somehow change what we were seeing seemed quite remote at that point, and that enabled the committee to take action.
CHILDS: GDP had declined so substantially that any revisions would probably not change the picture very much. It was safe to call it. It had two of the three D's of doom.
POTERBA: So you could get to the debt by having a really sharp decline, which is what we had in in early 2020. You could get to diffusion by having something that was broadly spread across the whole economy.
CHILDS: The 2020 episode checked two of the three D's of doom so hard that the third, duration, was kind of knocked out. How long or short the period was didn't matter. So they called the pandemic downturn a recession. It is the shortest one in American history.
ROSALSKY: But this illustrates the argument in some corners of economics that the decisions of these eight people is kind of becoming obsolete. Like, we now have tons of data telling us in real time how the economy is doing. We have aggregated credit card information which tells us consumer spending. We can see immediate spikes in unemployment claims, the drop in small business revenues, all announcing when the party ended. So even with the committee convening right away, you know, for them, even then, it was too slow to inform policy. Congress had already passed the CARES Act. Fed programs were already up and running. So even at top speed, the committee's official determinations were kind of irrelevant.
CHILDS: But this kind of isn't even speaking the same language as the committee. Their work is to inform academic research, which then informs future policy - like, in a decade or ten, not right now, not right away.
ROSALSKY: The next GDP announcement for the second quarter comes out on July 28.
CHILDS: Obviously, I asked Ben if he thinks we're in a recession. He was on the committee in the late '70s and '80s when Fed chair Paul Volcker was battling high inflation. So his experience is particularly relevant.
FRIEDMAN: I think the more serious question is whether with the Federal Reserve raising interest rates in a vigorous way is going to trigger a recession. The historical experience of central banks around the world, not just ours, in being able to contain significant inflations without triggering economic downturns is not encouraging. That's just a fact.
CHILDS: Do you have any kind of, like, I saw this in the '70s; here's what we should be thinking about?
FRIEDMAN: I would say we know a lot about how this process works. It's not as if we're flying blind. It's not as if nobody's ever seen high inflation before. It's not as if nobody's ever seen inflation come down before.
CHILDS: From Ben's informed, long-view academic perspective, to some extent we know what this looks like, and we have some vague sense of what we can do - because researchers have been able to speak a common language and learn something from all the recessions of the past.
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ROSALSKY: If you want to keep tabs on how the economy is doing and what the field of economic research is looking at these days, check out PLANET MONEY's newsletter.
CHILDS: Greg writes it. It's great. It's succinct. It's in your inbox once a week. You can subscribe at npr.org/planetmoneynewsletter. Today's show was produced by Willa Rubin. It was engineered by Gilli Moon and edited by Jess Jiang. Special thanks to Mary Clare Peate. PLANET MONEY's executive producer is Alex Goldmark. I'm Mary Childs.
ROSALSKY: And I'm Greg Rosalsky. This is NPR. Thanks for listening.
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