James D. Hamilton*
(Updated August 9, 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:Q2 advance GDP numbers released by the U.S. Bureau of Economic Analysis (BEA) on July 30, 2014, a value of the recession indicator index describing economic conditions for the first quarter of 2014 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 BEA has reported a choppy performance for the U.S. economy over the last year, with solid growth in the second half of 2013 and second quarter of 2014 but a sharp decline in real GDP in the first quarter. The recent data led to a spike in the recession indicator up to 24.1 percent.
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 current reading of 24.1 percent is far below that threshold, and if the second quarter GDP estimate holds up under revisions, we would expect to see the next reading for the index fall back to more normal levels.
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 2014: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.