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It’s not officially a recession until this Cambridge-based group says so, and making that call is a little like ‘Fight Club’

Drivers lined up in their cars outside a Lynnfield Gulf station on July 19. Soaring gas prices have fueled four-decade-high inflation that has put the economy at risk of recession.JOSEPH PREZIOSO/AFP via Getty Images

WASHINGTON — There’s a good chance the US Commerce Department will report Thursday that the economy shrank from April through June, a second-straight quarterly contraction that by a conventional rule of thumb would mean the nation is in a recession.

But it’s not officially a recession until a small group of experts empaneled by the National Bureau of Economic Research in Cambridge says so — and they are known to take their time.

The private organization that the federal government has empowered to designate recessions is headquartered in a nondescript office building between Harvard and Central squares, with a parking lot next to Hubba Hubba, a self-proclaimed “sex positive” boutique. Outside economists describe its workings as mysterious, and the long wait for its recession pronouncements can be like watching for the white smoke heralding a new pope.

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Their declarations carry major political implications, given recessions can doom whatever party is in power. And undoubtedly the Biden administration and congressional Democrats will be on tenterhooks awaiting its latest decision — although an announcement might not come before voters go to the polls in November.

At some point in the coming weeks, and with no public notice, a committee of eight academic economists is likely to convene virtually to determine whether there has been, in NBER’s words, “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” If the members of the “Business Cycle Dating Committee” make that determination — which involves much more than two straight quarters of contraction — they’ll issue a declaration that includes the date, usually months earlier, when they have deemed the recession actually began.

If they don’t make a determination, they usually will say nothing as part of a tight-lipped undertaking that evokes the movie “Fight Club,” in which the first rule of the club, and the second rule, too, is that you don’t talk about it.

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“I realize for some people it may seem secretive or elitist or something, but people in the economics profession and the financial world have a lot of respect for the NBER,” said Jeffrey A. Frankel, a Harvard economist who served on the committee from 1993-96 and 1999-2019.

Part of that respect derives from the committee never having had to rescind a recession declaration in its 44-year history, an impressive record given economic data is often later significantly revised, causing some formal recession determinations in other countries to be changed after the fact. But the meticulous process means it often takes months after a recession has started before NBER makes its announcement.

“We’re very concerned about the reliability and our reputation for getting it right — and getting it right by waiting,” said Robert E. Hall, a Stanford economist who has chaired the NBER panel since it was formed in 1978. “We’ve made a decision that the inner workings of the committee are not to be disclosed, including the fact that a meeting is occurring.”

But the absence of a recession declaration creates an information void. Many people, including some economists, default to the two-quarter rule that usually — although not always — is correct. And until NBER makes its announcement, Democrats and Republicans are able to spar about whether the nation is actually in a recession.

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The lack of a determination before the November elections could be a boost to Democrats as they try to hold their narrow congressional majorities. But Hall and NBER president James M. Poterba, an MIT economist who has served on the recession dating committee since 2008, said politics does not factor into its decision-making.

And Frankel said he couldn’t remember “any hints of politics” during his time on the committee.

“We all read the papers, but in none of those meetings was there any discussion of any political factors, and that includes even a question like, ‘If we wait, or if we make the declaration now before an election, will people think it was political?’” he said. “That isn’t even discussed because everyone knows … the determination is made on the merits and not on political grounds.”

The political ramifications of a recession determination were evident in 2004. President George W. Bush asserted he had inherited a recession when he took office in January 2001. But NBER said the recession didn’t start until March 2001, and the matter became a point of contention in his reelection campaign.

Often the committee’s decision is anticlimactic, as a recession is clearly felt before it makes its announcement. After months of bad economic data, the NBER announcement can be greeted with a shrug. “‘National Bureau finally recognizes what we all knew,’ is the way it’s usually written up,” Hall said.

The committee’s deliberation in this instance, however, is not likely to be so straightforward, given the pandemic’s odd and unpredictable effects on the economy.

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The Commerce Department already has reported that the US economy contracted at a 1.6 percent annual rate from January through March. But a big factor in the calculation was a record high trade deficit caused by a surge in imports, which indicates the US economy was actually still growing. So does other data, including continued strong job growth.

A closely followed tracker by the Federal Reserve Bank of Atlanta estimates the economy shrank at a similar pace from April through June. But some economists are dubious for the same reasons. Another negative number when the Commerce Department releases its initial estimate of second-quarter growth on Thursday would turn attention to the obscure NBER.

The organization began in 1920 amid debates about income distribution in the fast-industrializing nation. Two key players in its founding were Malcolm Rorty, an executive at AT&T, and Nachum Stone, a socialist labor organizer, who found common ground on one thing: There was a dearth of economic data to settle disputes.

Because of their differing views on just about everything else, the organization’s odd couple founders decided to steer clear of making recommendations on issues like taxes or social programs, Poterba said. “We provide information, we provide analysis, we provide data, but we do not recommend a policy,” he said.

One of the organization’s first projects was analyzing the nation’s business cycles, the peaks and troughs in activity that indicate when the economy is expanding or in a recession. NBER became so expert that the Commerce Department included the group’s data in a new business conditions publication in 1961. Since then, the Commerce Department defers to NBER on recession designations.

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NBER expanded in the late 1970s under the leadership of Harvard economist Martin S. Feldstein. He moved the headquarters from New York to Cambridge, increased the number of affiliated economists, and expanded an initiative to distribute research papers before the lengthy peer-review process was completed to keep economists up-to-date on developments.

But his most significant move was formalizing the process for dating when a recession began and ended. He appointed a committee led by Hall to make the designations more in real time — but not so fast that it damaged NBER’s reputation.

Then-Federal Reserve Chairman Ben Bernanke answered questions during a meeting with the National Bureau of Economic Research in 2007 at the Royal Sonesta Hotel in Cambridge. Bernanke served on the group's recession dating committee from 2000-02.Greene, Bill Globe Staff

“The last thing we wanted to do was to look like we were showing off and then get it wrong,” Hall said.

The committee sometimes met in its early years at NBER’s Cambridge headquarters, which now is home to the organization’s approximately 40 staff members. But with members spread around the country, they later often made their determinations on conference calls and now gather via Zoom, Hall said.

The process can be painstakingly slow as the committee reviews a variety of economic data to determine the month when a recession began or ended. Since 1980, there’s been an average of 11 months between that date and when the committee agreed on it and made the announcement. The lag is not ideal for government officials trying to address economic problems.

“I can’t imagine it couldn’t be speeded up, but I doubt by very much,” said Douglas Holtz-Eakin, a former director of the Congressional Budget Office. Economic data is frequently revised and he doesn’t think it’s a good idea for government officials to make the recession determination because of the potential for political pressure.

“It is best done the way the bureau does it, by private sector researchers who are interested in economic fluctuations and aren’t doing it in real time to affect the November election,” said Holtz-Eakin, now president of the conservative-leaning American Action Forum think tank.

Not only has NBER faced criticism for the amount of time it takes to make a decision, but also for the lack of diversity among the committee members making the call. The panel has two women members, but for much of its history it was all male. And it has never had a member who wasn’t white. That makeup could affect the recession decisions, said Gary Hoover, co-chair of the American Economic Association’s Committee on the Status of Minority Groups in the Economics Profession.

“We could say, ‘OK, we’ve got a recession, how is that going to impact different groups across racial and ethnic lines?’ " said Hoover, a Tulane University economist. “I’m African American and those would be the type of things that I would think about, and that’s why I would think some type of diversity of thought might be beneficial for them.”

He acknowledged he wasn’t sure if committee members took those matters into account because the committee’s workings are a mystery to him.

“In the economics profession, it’s always just sort of been taken as gospel from on high,” Hoover said of the recession announcements.

Poterba, who appoints members of the recession-dating committee, said that diversity has been a problem in the economics field and NBER is taking steps to try to address it, including launching a working group on race and stratification in the economy in 2020. The committee is a “slowly evolving group” in which institutional memory is valued to make consistent recession determinations, he said. Six of the eight current members have served for at least a decade, and two of them have been on the committee since its inception.

“We have certainly been working, as has the economics profession more generally, to try to be much more attuned to issues of diversity and inclusion in the last few years and I think that’s a very welcome thing,” Poterba said.

The committee does provide some insight into its recession dating process. There’s a lengthy page of answers to frequently asked questions on its website, including a list of the economic data that the committee analyzes and where to find them. Poterba stressed there’s not “some special magic formula” in making the determination, just the expertise and judgment of committee members.

It’s a process that takes time and patience, Hall said. And, given the group’s track record, he doesn’t see a reason to change.

“We do it that way and it works,” Hall said.


Jim Puzzanghera can be reached at jim.puzzanghera@globe.com. Follow him @JimPuzzanghera.