James D. Hamilton*
(Updated August 5, 2013)
The GDP-based recession indicator index is a pattern-recognition algorithm that assigns dates to when recessions begin and end 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 and confirm the current trend. With the 2013:Q2 advance GDP numbers released by the Bureau of Economic Analysis on July 31, 2013, we can calculate a value of the recession indicator index describing economic conditions for the first quarter of 2013. 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.
The benchmark revisions in the national accounts that were released on July 31 suggest even weaker growth for 2012:Q4 and 2013:Q1 than the earlier reports from the BEA implied. U.S. real GDP is now reported to have barely grown in 2012:Q4 and to have grown only at a 1.1 percent annual rate in the first quarter of 2013. This weak growth has led to a sharp increase in the recession indicator index, which now stands at 30.5 percent. One factor in the slow growth of 2012:Q4 and 2013:Q1 was a reduction in government purchases of goods and services.
The recession indicator index provides one objective signal that the recent GDP numbers are even weaker than we've become accustomed to seeing since the economy began its disappointing recovery from the Great Recession in 2009:Q3. Note, however, that this does not mean the economy has entered recession territory. The index would have to rise above 67 percent before such a declaration would be warranted, 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). Using their rules for dating business cycles, 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 its end-date declaration until September 2010.
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 2013: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.