Wednesday, September 18, 2013

The Recession Isn’t Over -- or Is it?

One complaint I often hear from people is that despite what economists say, the recession isn’t over! In technical terms, the semi-official measure of recessions created by the National Bureau of Economic Research indicates that the “Great Recession” that began in December 2007 ended in the middle of 2009. But reasonably enough, people point to the facts that incomes are still stagnant, paid employment is still at a very low percentage of the population, long-term unemployment is still high, and the like. They also point to their own personal experience. What people often miss, however, is that the standard definition of a “recession” refers only to the decline of the economy. It does not say anything about the period of stagnation that can occur after the NBER recession is over during which the economy can get stuck on the “floor.” That is, the standard definition of a “recession” describes it as being like the tide receding in the ocean – but doesn’t cover the possibility that the tide might stay low for a long time.

But there’s another way to look at this issue: what if we’ve used the wrong number to see what’s “recessed”? The standard measure used by the NBER is very complex but in practice fits pretty well with the journalist’s rule of thumb. The latter says that a “recession” occurs when inflation-corrected or “real” Gross Domestic Product falls for two or more quarters (of a year) in a row. This rule of thumb suggests an alternative measure, one much closer to home. Using this measure, the popular complaint about the recession not being over may be right on target.

What if we see recessions as measured by a fall in the “real” median household income? This is the income of a household that’s smack dab in the middle of the income distribution, with an income higher than the poorer half of households but worse than the richer half. Since only annual data are available, a “recession” refers to the fall of that number from the previous year. This means that if this kind of recession occurs, an "average" household is suffering. As seen in the table below, this calculation implies different years for recessions. Call this a “household income recession.” The table also represents the different dates for NBER recessions during recent decades. Because median household income is measured only from year to year, my dating of recessions cannot correspond exactly to the NBER dating.

“Recession A” really consists of two back-to-back NBER recessions (a double dipper). It should be dubbed the “Volcker recession,” because the gap between the two was so short (with a very weak recovery in-between) and they occurred due to the Federal Reserve’s war against inflation. (In fact, one way to define a "double dip" recession is by the fact that we see two NBER recessions within a period characterized by a single Household Income Recession.) The table indicates that the household income recession started earlier and lasted one year longer than the NBER recession: real household incomes kept falling going from 1982 to 1983. Pundits who focus on the NBER definition miss how bad the recession(s) were for people on Main Street.

The NBER recession of 1990-91 (under the guidance of the “Maestro,” Alan Greenspan) is often seen as being "small" since it was less than one year long. But like the Volcker recession, household incomes continued to fall after the NBER recession had ended, all the way into 1993. This approximately two-year delay helps explain candidate Clinton’s slogan “it’s the economy, stupid!” and the dissatisfaction with President Bush #1 that helped speed his ouster from the White House. Of course, it was also this recession which spawned the seemingly oxymoronic phrase “jobless recovery”: even though the economy was “recovering” by NBER standards, the availability of jobs was stagnant. The latter fits with the idea of the Household Income Recession continuing into 1993.

Recession C (still during the Maestro’s reign, at the end of Clinton’s term) is renowned among pundits for being short and perhaps even sweet. According to the NBER definition, it started after 2001 began and ended before 2002 had even started. But for the average household, incomes fell earlier (going into 2000) and then continued to fall all the way until 2004. This fits with what critics of the “Bush #2 recovery” have been saying for a long time. This was another jobless recovery. In addition, it suggests that the hype about Clinton’s success at the end of his term has been overblown.

Finally, there’s the “Great Recession” (at the end of #2's terms and the start of Obama's), which the NBER dates from Dec. 2007 to June 2009. When measured using real median household income, however, this recession continued into 2012, exactly as the popular critics say. However, our data can’t tell us whether the Household Income Recession is over or not, since the numbers for 2013 won’t be available until next year. That's why the title to this note ended with a question.
-- Jim Devine

PS: I didn't use per capita income to measure recessions because the high incomes of the rich are represented disproportionately. Ignoring other changes, for example, if the incomes of the Koch brothers doubles, but the incomes of the non-Kochs stay the same, that raises per capita income. The median household income would say the same.

(The numbers for median household income are from the U.S. Bureau of the Census at,  Table H-6.)

9 comments: said...

Hi, Jim, good to see you posting here again.

I have seen reports, sorry, no link, that indeed at best there will be no solid increase in median household income in 2013, even if it does go up slightly.

Econoclast said...

thanks for the welcome. I gave up on pen-l. Too many trolls. said...

And if you do well here, Mark Thoma might link to you on Economistsview, :-).

Wallfly said...

Jim, This makes me wonder if anyone tracks the "break-even" quantile and the realationship between the b.e.q and the mean real income.

Also, this story depends on unemployment, increasing part-time work and wage stagnation, does interest income have much effect on the lower half?

(I am not economist but I have had to take data analysis for a recent degree)

Econoclast said...


What is the meaning of the phrase "break-even quantile"? (is it supposed to be quintile?) Where can I find data on this?

Some people who live on annuities or bonds are hurt by low interest rates, but my impression is that most of the income of folks earning below the median household income do not rely on interest income but instead on wages and salaries. Of course, the richer folks don't rely on interest as much as dividends and capital gains (and princely salaries & bonuses).

Bruce Webb said...

I prefer to use the metaphor of 'pie'. (And why not? People like pie and get the message).

Pie eaters (median wage households) get actual immediate satisfaction by absolute size of the pie slice. Certainly not by seeing the overall size of the pie or the relative size of the slice, those if anything simply breed resentment at the perceived inequity. But don't starve from inequity, you starve from too little pie (or pie equivalent).

NBER and much of classical economics simply presents 'pie' as the proper measure of satisfaction and simply leave the Pie Slicer to be wielded by the 'Invisible Hand'. But when you are actually made hungry by the inadequacy of the absolute pie slice or resentful at the size of the relative pie slice the overall size of the pie ranges from irrelevant to an active source of aggravatation.

Yet from Ricardo to the Rising Tide/Supply Siders the message to the pie eaters has always been simply "Pie!". Even when the would be pie eaters are shut away from it on the other side of the glass from the pie shop. Or maybe get some crumbs.

Simple images from a simple (minded) man. Or not.

Econoclast said...

There is no Invisible Hand, so Classical economics should be defunct. RIP.

Otherwise, Bruce, I see what you're saying. But the "inequity" of growing _per capita_ incomes at the same time that _median_ incomes stagnate or even fall is more than a matter of perception ("perceived inequity"). It's real-world inequality that implies large differences of power in society between the haves and the have-nots and thus leads to large social divisions (lack of communication, etc., etc.) And it's part of a persistent trend that started around 1979 (when Volcker took over the Fed). More generally, it's a matter of the owners of capital (and thus the rulers of the economy) using their power to accumulate more wealth and political clout, which allows them to accumulate even more.
-- Jim Devine

Jazzbumpa said...


What happened to the table?

Econoclast said...

the picture is back. (Somehow, erasing the picture on the Google cloud erased it here.)