James D. Hamilton*
(Updated May 15, 2014)
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. Thus, with the 2014:Q1 advance GDP numbers released by the U.S. Bureau of Economic Analysis on April 30, 2014, a value of the recession indicator index describing economic conditions for the fourth quarter of 2013 can be calculated. 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 U.S. economy grew steadily during 2013 at a rate a little below the historical average. But the advance BEA estimates suggest that the economy barely grew in the first quarter of 2014. That warrants a very modest increase in the GDP-based recession indicator index, which had been as low as 3.3% for the third quarter of 2013 but edged up to 9.9% for the fourth quarter. Though higher than it was in the third quarter, the new level supports the conclusion that the U.S. economy continued to be in the expansion phase of the business cycle through the end of 2013.
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) proposed that we could declare the U.S. economy to be in a recession if the index rises above 67 percent. Based on the recession indicator index, the Great 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 Economic Research, 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:Q4 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.