Or, why don't we use GDP alone Determine business cycle dates. First, consider our various output measures.
figure 1: GDP (blue), GDO (tan) and GDP+ (green), final sales (red), all in 2017 USD billion seasonally adjusted exchange rates. GDP+ assumes that GDP+ in the fourth quarter of 2019 is equal to GDP. The hypothetical recession in the first half of 2022 appears light blue. Source: BEA 2023 Q4 Estimates, Philadelphia Fedand the author's calculations.
Although GDP and GDO declined in the first half of 2022, GDP+, which aims to reach the final level of GDP, continued to grow in the first half of 2022. Final sales (GDP net of inventory accumulation) showed only a one-quarter decline.I might note that the GDO for Q2 2022 is only 0.26 percentage points Below levels in Q4 2021…
Second, consider other more timely indicators of economic activity. The NBER's Business Cycle Dating Committee relies on a range of variables, chief among them recent nonfarm employment and personal income excluding current transfers. This is shown in Figure 2 below, which adds monthly GDP and official quarterly GDP.
figure 2: Nonfarm payroll employment (dark blue bold), Bloomberg 2/1 consensus (blue +), civilian employment (orange), industrial production (red), 2017 personal income excluding current transfers $ (green bold) , Manufacturing and Trade Sales in Ch.2017 (Black), Consumption$ in Ch.2017 (Light Blue) and Monthly GDP in Ch.2017 (Pink), GDP, Ch.2023 4 Early season release (blue bar), with all logarithms normalized to 2021M11=0. The hypothetical recession in the first half of 2022 appears light blue. Source: BEA, BLS via FRED, Federal Reserve, Q4 2023 Advance Release, S&P Global Market Insights (Nigerian macroeconomic consultant, IHS Markit) (2/1/Released in 2024) and the author's calculations.
Different variables go in different directions, making it difficult to come up with a consistent story. One way to circumvent this problem is to summarize the information in these series into a single series.Principal component analysis is a method such as Atkinson et al. Federal Reserve Bank of Dallas (2022). Figure 3 shows the first principal component of the above series (except monthly GDP and official GDP).
image 3: The first principal component is non-agricultural employment population, industrial production, personal income (except current transfers), manufacturing and trading industry sales, consumption, and log employment, 2007M01-2023M11. The hypothetical recession in the first half of 2022 appears light blue. Source: Author's calculations.
The Philadelphia Fed calculates a consistent index for states and the U.S. as a whole, which is primarily based on labor market data. This series is shown in Figure 4 below, which is a blue series that continues to rise.Related to this, one possibility is to examine geographically defined diffusion indices against the Philadelphia Federal Reserve Bank's consensus index, e.g. Picerno(2024).
Figure 4: Coincidence index (blue, left axis) and 3-month growth diffusion index (tan, right axis) for the United States. A diffusion index of +100 means all states are growing; -100 means all states are signing up. The hypothetical recession in the first half of 2022 appears light blue. source: Philadelphia Fed.
Note that the consensus index shows no decline during the presumed recession in the first half of 2022. In fact, the diffusion index, which is based on the number of states experiencing expansion/contraction, declined slightly in the second half of 2022, to 86. For comparison, the diffusion index at the start of the recession in April 2001 was 16 (the NBER peaked in January 2001).
Finally, we can look at labor market conditions as summarized by the unemployment rate. The Sahm Rule (immediate) indicator (three-month moving average relative to the previous year's lowest unemployment rate) is shown in Figure 5. The threshold for the onset of recession is +0.5 percentage points. The indicator for the first half of 2022 is below zero.
Figure 5: Sam's rule, expressed as a percentage (blue), and decay threshold (red dashed line). Source: Fred.
Now, suppose someone wanted to use GDP—specifically GDP growth—as a means of determining whether a country is in recession. Jim Hamilton took exactly this approach (you can access the odds on FRED) here).I post his below Estimating odds as of Q1 2022 using Q2 2022 GDP released in advance in July 2022the chart annotation includes a hypothetical recession in the first half of 2022 and a 65% threshold.
source: Hamilton(2022a). Note: Hamiltonian recession probabilities (black) and NBER-defined recession dates are shaded gray. The hypothetical recession in the first half of 2022 appears light blue. 65% threshold red line.
When Q3 2022 was released ahead of schedule, Jim posted this chart (I've annotated it to include a hypothetical recession in the first half of 2022).
source: Hamilton(2022b). Note: Hamiltonian recession probabilities (black) and NBER-defined recession dates are shaded gray. The hypothetical recession in the first half of 2022 appears light blue. 65% threshold red line.
Additional Notes on NBER’s Definition of Recession slideshow.
