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August 20, 2008

The recession computer says: Not yet!

I have argued that we are in a recession and presented the views of others who agree. Here is some impressive evidence that this is not a recession. UCLA's Edward Leamer has written a modest algorithm (a sequence of instructions that could be programmed into a computer) that, when it runs through the data, declares recessions almost exactly at the same dates that the official (human) committee in Cambridge, Mass., declares them to have occurred over the decades. And the computer says: This is no recession (so far).

I offer here an algorithm that perfectly identifies the ten official NBER [National Bureau of Economic Research] recessions since WWII and that closely reproduces the official NBER monthly peak and trough dates...

The point of an algorithm is to take the guesswork out of the recession definition. For
those who are too busy to read more than one paragraph, here is the punch line: We are
not yet in a recession. For those who insist otherwise, I offer a challenge: What’s your
algorithm?... Bottom line: things have to get much worse to pass the recession threshold.

Given the importance of having some clear definition of a recession, it is more than a little aggravating that the official recessions are decided by a committee of Ph.D. economists. We can just imagine the committee meeting at which the members pour over data displays to try to decide if there was a recession, and, if so, when it began and when it ended. This brings up fantasies of Justice Potter Stewart and other members of the Supreme Court perusing pictures of naked men and women to decide which pictures are pornographic and which are not...

Another of my favorites is “It may not be a recession, but it sure feels like one.” I am
resisting the temptation to write a delicious, salacious, analogous statement for

Posted by Jay Hancock at 11:11 AM | | Comments (0)

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About Jay Hancock
Jay Hancock has been a financial columnist for The Baltimore Sun since 2001. He has also been The Baltimore Sun's diplomatic correspondent in Washington and its chief economics writer. Before moving to Baltimore in 1994 he worked for The Virginian-Pilot of Norfolk and The Daily Press of Newport News.

His columns appear Tuesdays and Sundays.

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