Mankiw on Business Cycle Dating and the 2001 Recession

August 18, 2006

Comments

N. Gregory Mankiw has an interesting post on the question of when exactly did the 2001 recession start? Mankiw points out that four of the time series used in determining when recession start and end have been revised substantially and that the March 2001 dating of the recession is probably too late.

There is quite a bit of validity to this claim, IMO. For example, look at the employment data. Frist up is the payroll survey.

Clearly the time series reaches a (local) peak right about 2001 (the data actually start declining in March of 2001).

Next look at the unemployment rate,

Again, we see that the rise in the unemployment rate is right around the start of 2001 (January 2001 to be exact). Now one might conclude, “This doesn’t point to a recession starting in 2000.” The problem is that employment is a lagging economic indicator. That is, unemployment might continue to go down or not rise for sometime after the end of the recession. Similarly with the start of a recession, unemployment can go down or not decrease even after a recession has started. If the time of the lag is just two or three months this would push back the start of the recession to prior to Bush came into office and could possibly move into the last quarter Clinton was in office…if you have your panties in a knot over which President is in office when recessions start and end.

Mankiw also points to this paper by James Hamilton (a very well known and highly respected time series econometrician) and Marcelle Chauvet. Hamilton and Chauvet put the start of the last recession at September 2000 (see table 6). However, also note that in Table 8 we have the results of the recursive estimation methodology and this puts the start of the recession at March 2001 which coincides exactly with the NBER start date.

James Hamilton’s co-blogger, Menzie Chinn, also looks at this controversy and comes to the conclusion that the recession started in 2001. However, Chinn also notes that given the data reasonable people can disagree about this. Dating business cycles is more of an art than a science (although those who do it try to be as scientific as possible). Saying that the recession started sometime between the last quarter of 2000 and the first quarter of 2001 is almost surely true. Of course for all the partisan bloggers, talking heads, and radio show pundits this isn’t all that helpful as they can’t really point the blame finger at anyone.

11 responses to “Mankiw on Business Cycle Dating and the 2001 Recession”

Steven Plunk

August 18, 2006 at 2:00 pm

Now that we kind of, sort of have a start date (five years after the fact) can economists come up with the reasons and what future leaders can do to stop or minimize economic slowdowns?

I am partisan to a degree but if we can massage the economy to help avoid recessions I don’t care which party gets it done.
Steve Verdon

August 18, 2006 at 2:15 pm

Now that we kind of, sort of have a start date (five years after the fact) can economists come up with the reasons and what future leaders can do to stop or minimize economic slowdowns?

The first person to come up with the answer to this will be amazingly famous (at least with economists) and likely rich (e.g. a Nobel in economics).
yetanotherjohn

August 18, 2006 at 2:24 pm

While the start date is useful for assigning ‘who done it’, in a reasonable version of the blame game, wouldn’t you have to also point to something that they did? What economic policy could Bush have done to start a recession in the first quarter of taking office, let alone did do? Of course being able to point to what would cause a recession would go a fair amount of the way to figure out what to do differently and the ‘Dynamite King’ prize.
Steve Verdon

August 18, 2006 at 2:43 pm

While the start date is useful for assigning ‘who done it’, in a reasonable version of the blame game, wouldn’t you have to also point to something that they did?

Okay, so if it was Clinton what is the specific thing he did that caused the recession?
spencer

August 18, 2006 at 2:46 pm

Now that we kind of, sort of have a start date (five years after the fact) can economists come up with the reasons and what future leaders can do to stop or minimize economic slowdowns?

My personal theory is that recessions occur when the business community as a whole makes a mistake. It usually stems from involuntary inventory accumulation but this time it was over investment.

So to have a policy that prevents recession not only do you have to pick the right policy you have to convince the business community–political community — to support a policy that is contrary to their beliefs about the environment. It is like the argument that Greenspan should have prevented the bubble.
But that would have required him to raise rates enough to abort the late 1990s investment boom–
a policy that would have been very hard to sell
let alone implement.
yetanotherjohn

August 18, 2006 at 3:59 pm

Steve,

I wasn’t so much arguing that it was or wasn’t Clinton. What I was trying to point to is that there is often a lag between cause and effect. So the sum total of 8 years of economic choices by a president would be more likely to be the cause of a recession than those of a president who had been in office less than 3 months. For example, the impact of regulation choices could certainly have a cumulative effect to cause a recession.

Now that is not a hard and fast thing. If Bush had come into office and immediately put the country on a gold standard, that could be something that could potentially cause a recession (especially if the money supply was severely restricted to comply with the gold standard). But absent some similar massive and immediate program, if a recession was caused by any branch of the federal government (something that I don’t think has been shown yet), then the amount of time for causing the recession should be considered.

If a recession occurred now, it would be pretty hard to argue that it was Clinton who caused it. Certainly if compelling proof was offered it should be looked at, but that wouldn’t be the way to bet. Likewise, if a recession comes less than three months into a president’s first term, the level of proof that the new president caused it would seem to me to be higher than saying the preceding 8 years where not the cause.
spencer

August 18, 2006 at 5:06 pm

What caused the recession was over investment by the private sector. Government policy had little or nothing to do with it.

Yes, by getting out of the way and running a surplus that freed up capital to finance the investment boom you can argue Clinton contributed to the boom and bust, but that is really stretching it.

The Fed raising rates was probably the trigger, but the small rate hike was not enough in and of itself to cause the recession.
Bithead

August 18, 2006 at 5:07 pm

YAJ:

What economic policy could Bush have done to start a recession in the first quarter of taking office, let alone did do?

Indeed. There is no logical way that that recession can be laid at the feet of the bush administration. They simply hadn’t been in office long enough.

However; If we assume as I have all along, that economic conditions, as they develop, are set in the motion months, if not years prior to the times when those economic conditions finally do occur, then we must conclude that the conditions that sets the late 1999 recession into motion, were in fact put into place smack dab in the midst of the Clinton residency.

That’s not a partisan response, that’s merely an observation of fact.

I once again make note of the fact that partisanship is a phrase that only it’s used when Democrats are finding their feet being held to the fire.
Steve Verdon

August 18, 2006 at 5:21 pm

However; If we assume as I have all along, that economic conditions, as they develop, are set in the motion months, if not years prior to the times when those economic conditions finally do occur, then we must conclude that the conditions that sets the late 1999 recession into motion, were in fact put into place smack dab in the midst of the Clinton residency.

1999 Recession?!?!?! Please tell me that is a typo. Nobody has hinted that the recession started in 1999 and there is absolutely no evidence to support this claim.

Also, it is hard to believe this,

That’s not a partisan response, that’s merely an observation of fact.

When your write this,

Indeed. There is no logical way that that recession can be laid at the feet of the bush administration. They simply hadn’t been in office long enough.

How about no President wants a recession to start, either at the begining of his term, in the middle or at the end. And the corollary is that blaming recessions on Presidents, at least not without being able to point to something more specific, is just dumb, irrespective of political party?
fletch

August 18, 2006 at 10:39 pm

steve-

Okay, so if it was Clinton what is the specific thing he did that caused the recession?

Clinton didn’t fire Greenspan in 1996-97 at the beginning of his second term.

This made Greenspan an absolute “untouchable”- thus the combined “stock bubble/housing bubble” that he(AG) left for others to clean up…
Bithead

August 20, 2006 at 8:51 pm

1999 Recession?!?!?! Please tell me that is a typo.

Nope.

Nobody has hinted that the recession started in 1999 and there is absolutely no evidence to support this claim.

Hmmm.

Where did I see that again?

Maybe, apparently the dating committee is looking at revising when the last recession started (requires free registration). The revision is in light of the changes in GDP due to methodological and definitional changes in the way GDP is calaculated. These changes resulted in the thrid quarter GDP growth for 2000 to be negative.

The National Bureau of Economic Research said revisions to the government’s gross domestic product data, contained in the National Income and Product Accounts, offered a good opportunity to possibly change the measurement of the last recession.

The bureau’s Business Cycle Dating Committee has already ruled the downturn began in March 2001 and ended in November 2001. But changes to economic data by the Commerce Department now show the economy first contracted in the third quarter of 2000, rather than the first quarter of 2001.

Oh well, I’m sure it would still be called the Bush recession even if it turned out to have started in 1900 instead of 2001.

Even before the revisions, the GDP data showed that the economy hit a brick wall in the summer of 2000, after the stock market bubble burst.

Many data series were showing that the economy was definitely in trouble in the last half of 2000. Manufacturing was peaking, leading indicator indexes were heading south, and now we find out that in one quarter GDP growth was negative.

Oh, yeah… that’s where.

You of anybody here should recognize that economic factors take a while to spin up. I call it the 1999 recession because all of the necessary policies to create that recession were in place as of 1999. The recession was Clinton’s.