James D. Hamilton*
(Updated November 19, 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. Thus, with the 2013:Q3 advance GDP numbers released by the U.S. Bureau of Economic Analysis on November 7, 2013, a value of the recession indicator index describing economic conditions for the second 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.
Real GDP growth had been quite weak in 2012:Q4 and 2013:Q1, which led the recession indicator index to spike above 30 percent for 2013:Q1, though still well below the 67 percent threshold for declaring a recession that was proposed in the 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). Real GDP growth for the second and third quarters is now reported to have been above 2.5 percent at an annual rate. Although this growth rate is still not enough to bring the unemployment rate back to historically normal levels, it is far from the numbers that would be associated with an economic recession. The release of the 2013:Q3 GDP estimate brought the recession indicator index back down to 12.4 percent for describing the state of the U.S. economy in 2013:Q2.
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 (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:Q2 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.