The
Mechanics of a Recession
The National Bureau of Economic Research (NBER) “is a
private, nonprofit, nonpartisan research organization dedicated to promoting a
greater understanding of how the economy works.” (www.nber.org).
They maintain a list of “US Business Cycle Expansions
and Contractions.”
Below are some stats I ran on their list:
|
Peak to Peak Descriptive Statistics(Years)
|
|
|
Mean
|
4.703125
|
|
Standard Error
|
0.420296
|
|
Median
|
4
|
|
Mode
|
3.333333
|
|
Standard Deviation
|
2.377551
|
|
Sample Variance
|
5.65275
|
|
Kurtosis
|
0.276447
|
|
Skewness
|
1.035173
|
|
Range
|
9.25
|
|
Minimum
|
1.416667
|
|
Maximum
|
10.66667
|
|
Sum
|
150.5
|
|
Count
|
32
|
|
Confidence Level (95.0%)
|
0.857199
|
It seems as though 10.7
Years is the Max we have gone, Peak to Peak and 4.7 years is the average. We
are currently at 5.29 Years since their last reported peak of June of 2009. So
we are in the territory with no real indication of what’s to come in the next
five years given these recession intervals. We need a way to stay on our toes
and see what is happening in real time in order to gauge where we are within
the business cycle. We know we are in the expansion phase, the big question is
when does it slow down and how can we tell when this actually happening.
The NBER has a strong
highly correlated model for predicting a recession in real time. I believe The
FED uses the NBER to define periods of recession, and this model has shown high
accuracy in predicting those periods.
The model relies on four
economic indicators: Personal Income, Manufacturing Sales, Non-Farm Employment,
and Industrial Production.
How
This Affects Our Model
In our previous instalment we looked at the FFR and
the M2V. Our recent economic policy has created new conditions
that are hard to analyze. The FFR at zero doesn’t match the last two recessions
and the M2V is plummeting. The M2V is calculated by taking our monetary base M2
and dividing it by our GDP.
The reason the M2V is decreasing is because our M2 has
and is increasing faster than our GDP. QE pumped trillions of dollars into our
economy in a very short time, while our GDP has been growing at a healthy rate.
This has left M2V as a poor indicator. See the graph of this below.
Further
Reading, the NBER and Their Model
Wiki: The NBER
defines an economic recession as: "a significant decline in economic
activity spread across the economy, lasting more than a few months, normally
visible in real GDP, real income, employment, industrial production, and
wholesale-retail sales."
This model is capable of predicting “the real time
probabilities of recessions from the Dynamic Factor Model with Regime Switching
(DFMS).” Center for Research on Economic and Financial Cycles (CREFC).
This model was first proposed in 1998 by Chauvet:
Chauvet, Marcelle. 1998. An econometric
characterization of business cycle dynamics with factor structure and regime
switching. International Economic Review 39, no. 4:969–96.
Re-instated in 2006:
Chauvet, Marcelle, and James Hamilton. 2006. Dating
business cycle turning points. In Nonlinear time series analysis of business
cycles, edited by Costas Milas, Philip Rothman, and Dick van Dijk. Amsterdam:
Elsevier Science Publishing.
Exploring
the Model
“The series used include manufacturing and trade sales in 1982 dollars (MTS), total personal income less transfer payments in 1987 dollars (PILTP), employees on nonagricultural payrolls (ENAP), and industrial production (IP). As alternatives, we also examine gross domestic product (GDP), hours of employees on nonagricultural payrolls (HENAP), total civilian employment (TCE), and non-agricultural civilian employment (NACE).” (Chauvet 1998)
How
the Model is constructed
