James D. Hamilton*
(Updated August 3, 2010—see the chart and text in bold.)
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 2010:Q2 advance GDP numbers released by the Bureau of Economic Analysis on July 30, 2010, a value of the recession indicator index describing economic conditions for the first quarter of 2010 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 an expansion.
The value for the index for 2010:Q1 is 5.4, confirming previous readings that the recession is unambiguously over and a recovery has begun. According to the procedure recommended by Marcelle Chauvet and James Hamilton (in Nonlinear Time Series Analysis of Business Cycles, 2006, 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. The start date for the recession is the same as has been announced separately by the Business Cycle Dating Committee of the National Bureau of Research. As of July 30, 2010, the NBER has not yet assigned an end date for this recession.
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.
For more details about the method, see Chauvet and Hamilton's paper or the less technical description by Hamilton. One can also download a spreadsheet containing historical values of the index.
*James Hamilton is a professor of economics at the University of California, San Diego.
