James D. Hamilton*
(Updated July 31, 2012)
The GDP-based recession indicator index is a pattern-recognition algorithm that assigns dates to when recessions begin and end. It is based on the observed dynamics of U.S. real GDP growth. To make a reliable inference, it is necessary to wait one quarter for data to be revised. With the 2012:Q2 advance GDP numbers released by the Bureau of Economic Analysis on July 27, 2012, we can calculate a value of the recession indicator index describing economic conditions for the first quarter of 2012. To maximize usefulness as a real-time indicator, the index is not subsequently revised. The index ranges from 0 to 100, with a value above 50 indicating the data are more consistent with a recession than expansion.
While U.S. real GDP growth has been sluggish, it has grown consistently each quarter since 2009:Q3, bringing the most recent value for the index to a very modest 5.7 percent. Although the economic numbers have been disappointing in many respects, the fact that real GDP has continued to grow means that the U.S. economy would not be characterized as currently being in a recession.
Based on the procedure described in a paper by Marcelle Chauvet and James Hamilton (from Nonlinear Time Series Analysis of Business Cycles, 2006, edited by Costas Milas, Philip Rothman, and Dick van Dijk), the most recent recession was determined to have begun in 2007:Q4 and ended in 2009:Q2. These start and end dates for the recession are the same as were announced separately by the Business Cycle Dating Committee of the National Bureau of Research (NBER), though the NBER did not issue the end-date declaration until September 2010.
If there is a subsequent downturn in GDP growth, this approach would characterize it as the beginning of a new recession. The algorithm would declare that a new recession has begun if the index goes back above 67 percent.
The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter after the indicated date, with 2012:Q1 the last date shown on the graph. Shaded regions represent dates of NBER recessions, which were not used in any way in constructing the index, and which were sometimes not reported until two years after the date.
*James Hamilton is a professor of economics at the University of California, San Diego.