Martin Feldsteirn Discusses Chances of a Severe Recession in 2008

In addition to comments by Dr. Feldstein the article below is a good review article on how recessions are defined. By the way, Dr. Feldstein has been talking about this since last fall. From the USA Today:

The USA will likely sink into recession in 2008, and it could be "nasty" if policymakers don't act swiftly, according to a prominent economist.

"Unfortunately, I think that there is a better-than-even chance that we are headed into a recession in 2008," Martin Feldstein, an economics professor at Harvard University and president of the National Bureau of Economic Research (NBER), told USA TODAY Tuesday.

Feldstein isn't the only economist betting on a recession — and there are plenty of others who say a downturn will be avoided.

But few other economists have the official say as to whether a recession is underway. That official verdict will come from a little-known panel of academic economists, including Feldstein, making his comments particularly important. But anyone waiting for a recession verdict will likely have to wait a good long while.

The responsibility for defining U.S. recessions falls on the shoulders of seven economists who form the Business Cycle Dating Committee at the Cambridge, Mass.-based NBER. The organization has been dating business cycles since 1929 and first formed the all-volunteer committee 30 years ago.

While recessions are often described as two consecutive quarters of decline in economic output, that's not the official definition.

Instead, the panel looks at a series of economic data, including gross domestic product, income, employment, industrial production and retail sales. There is no formal model. The economists make their judgments based on subjective discussion of the data.

The committee hasn't discussed the "R word" in the current context, says Robert Hall, a Stanford University economics professor who has chaired the recession dating panel since its inception.

That's not a surprise, even if a recession is in progress. In a memo posted on its website Tuesday, the NBER said it typically declares the start of a recession six to 18 months after it happens.

It wasn't until November 2001 that the committee said the last recession had begun eight months earlier. The panel waited until July 2003 to announce that the recession had ended in November 2001.

Panel members say they don't want to jump to conclusions, in part because data are often revised.

"The big danger we have is something would look like a recession and then turn out later not to be one because it turned out to be a minor dip," Hall says.

Hall and others on the committee say their work is important for academic research. And knowing precisely when a recession starts and ends can help guide business people and economists during future downturns, Feldstein says. For example, they can use previous recessions as a rough month-by-month guide of what to expect when it comes to investment, employment and other key variables.

The procedure isn't without critics. Global Insight chief economist Nariman Behravesh argues that it takes too long and is too complicated. That can make business decisions, such as investment and hiring, tougher, says Behravesh, who says a recession is likely in the beginning stages. Most other countries follow the two-quarters-of-negative-GDP rule, he says.

But members of the NBER committee argue there are plenty of other people to speculate on recessions in real time.

"Everyone else is trying to be first and react quickly to new information," says Jeffrey Frankel, a professor at Harvard University who has been on the NBER committee since 1992. "That's not our job. Our job is to be definitive."

Just looking at GDP in real time can be misleading because the data are often significantly revised months, and even years, after their initial release, the NBER says.

And GDP doesn't capture the whole story of the economy, such as changes in employment. During the last recession in 2001, there were two negative quarters of GDP, but they weren't back-to-back.

Today, NBER President Feldstein says there are three main factors that are likely dragging the economy into a recession: the slump in housing construction, turmoil in financial markets and a drop in home values, which makes people more nervous and less apt to spend.

He argues that the Federal Reserve needs to aggressively cut interest rates, and Congress should enact some form of fiscal stimulus, such as one-time tax rebates for consumers to ease the pain.

"If we don't have some offsetting policy, and we move into a recession, then I'm afraid the fact that we've got all these things hitting at the same time could make it pretty nasty," Feldstein says.