Tracking America's Economy

Norman Frumkin

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317453499
• Edition: 4
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

This completely revised and updated edition of Norman Frumkin's acclaimed work offers vital information for the urgent growing debate on the state of the nation's economy. Frumkin makes complex ideas and statistical data accessible to people without special training in economics. His goal in this book is to provide a better understanding of the performance of the American economy, and a basis for evaluating proposals intended to influence its future course. Using data current through the first half of 2003, Frumkin focuses on the meaning and use of a wide array of indicators of economic growth, employment, wages, productivity, investment, saving, and finance in assessing the current state of the U.S. economy and forecasting future developments. Equally useful for economists, students, investors, journalists, and anyone concerned with the economy, this totally revised edition includes detailed coverage of many important new topics, such as terrorism's impact on the economy, federal debt and interest rates, job openings and unemployment, government spending and taxes, the 2001 recession, and more.

1

Attributes of Economic Indicators

The statistics central to evaluating and forecasting the macro economy of the United States are often referred to as economic indicators. This chapter discusses several conceptual and statistical topics that underlie the indicators: business cycles, determining cyclical turning points, seasonality, index numbers, data accuracy, calculating and presenting growth rates, price-adjusted dollars, the underground economy, distinctions among “goods,” “services,” and “structures,” the production of economic statistics, and data integrity.

BUSINESS CYCLES

Business cycles are the recurring rises and falls in the overall economy as reflected in production, income, employment, sales, profits, and prices. They are associated with capitalistic societies in which production, employment, prices, wages, and interest rates are largely determined in the marketplace. They are primarily associated with industrially advanced nations that have highly developed business and financial structures, in contrast to developing nations that have a large agricultural component that is subject to the vagaries of weather and the consequent abundant or poor harvests. Business cycles reflect the inability of the marketplace to accommodate smoothly such factors as shifting markets for new and substitute products, new technologies, uncertainties and risks in business investments, stock market speculation, global competition and currency volatility, terrorism, and shortages and gluts created by wars (including their buildups and aftermaths), weather-dependent harvests, and the manipulation of supplies and prices by cartels.

Economists have offered various theories to explain the causes of business cycles in the past, and they continue to provide varying explanations today.¹ The theories are tested empirically against the movements of the relevant economic indicators to determine how well the theories conform to the data. This is a continuing task of the economics profession in its pursuit of better insights into the workings of the economy. A basic purpose of the profession is to provide ever-better guides for government policies to foster maximum and stable economic growth, contain price inflation, and raise living conditions among all income groups, and in general to provide better guides for households and businesses to consider their spending, saving, and investment decisions in light of prospects for the overall economy.

While business cycles do not recur on a regular basis, and each cycle has unique characteristics, there are discernible regularities in the behavior of business cycles over time, as Victor Zarnowitz, the foremost student of business cycles, points out.² Examples of regularities are that business cycles are national and even international in scope, they last several years, and they often show repetitive patterns from cycle to cycle in the statistical movements of production, employment, various industries, household expenditures, business investment, prices, and interest rates.

The overall thrust of the American economy fits the competitive model even though the federal, state, and local governments provide public services and intervene in the economy in other ways, and though there are monopolistic aspects in the private sector that are insulated from fully competitive markets. While the American economy has changed considerably over the past two centuries because of new technologies and the growing population, business cycles are not new. They occurred repeatedly in the nineteenth and twentieth centuries.

The rising phase of a business cycle is typically referred to as expansion and the falling phase as recession. Although business cycle analysis focuses on the overall economy, it recognizes that particular sectors may be moving against the overall trend—a stagnant or declining industry may not participate in the prosperity of a general expansion, and a growth industry may be insulated from a general recession.

Determining Business Cycle Phases

What is a recession? Generally speaking, we know there is a recession when we see slack business activity and high unemployment. But there is also an observable measure of a recession period. The Business Cycle Dating Committee of the National Bureau of Economic Research, Inc. (NBER), a private nonprofit organization in Cambridge, Massachusetts, designates such periods. These recession periods are considered “official,” although they are not designated by a U.S. government agency.

Under the auspices of the NBER, the Business Cycle Dating Committee, which is composed of seven economists, is convened specifically to determine the beginning and ending points of expansions and recessions by assessing the preponderant direction of a wide range of economic indicators. The NBER Business Cycle Dating Committee has established a reputation for objectivity, and its designations are accepted by liberal and conservative economists and politicians alike.³

The advantage of having a nongovernmental body such as the NBER Dating Committee designate expansions and recessions is clear. It reduces the possibility that the administration in office will politicize the designations to put its own policies in the most favorable light, or even revise designations for previous periods to make the opposition party look worse, as the executive branch of the federal government runs the government’s statistical programs.

The NBER Business Cycle Dating Committee designates a recession as beginning in the month in which the overall direction of a broad spectrum of economic indicators turns downward; similarly, an expansion is designated as beginning in the month in which the overall direction turns upward.⁴ While various numerical tests are applied to the indicators to assess their direction, ultimately the decision is based on the judgment of the NBER Dating Committee. For example, a recession is popularly defined as occurring when the real gross domestic product (i.e., the price-adjusted GDP) declines for two consecutive quarters, but this definition is often not determinate, as some periods have been designated as recessions even though they did not include two consecutive quarters in which real GDP declined. The NBER Dating Committee considers a variety of monthly and quarterly data before making a determination, including but not limited to business sales, bank debits outside New York City, industrial production, unemployment rate, nonfarm employment and hours worked, personal income, and the less cyclically sensitive GDP in current and price-adjusted dollars. Because the cyclical turning point centers on a particular month, quarterly data such as the GDP cannot be strictly applied to the specific turning point. Nevertheless, movements in the quarterly data, even if showing an acceleration or deceleration rather than a change in direction, give more credibility for gauging the approximate time of the directional change.

An inherent limitation in determining the precise cyclical turning points is that the NBER Business Cycle Dating Committee functions close to when an economic downturn and recovery are occurring. Thus, of necessity it relies on the contemporaneous data available at the time. But subsequent revisions to the preliminary data sometimes alter the earlier picture of the economy given in the contemporaneous data. For example, when the Business Cycle Dating committee announced in November 2001 that a recession began in March 2001, the data then available to the Committee showed the decline in real GDP during 2001 first occurring in the third quarter of the year. Yet in July 2002, revised real GDP data showed a decline in each of the first three quarters of 2001.

A notable exception to the typical designations occurred after World War II. There was a short recession in 1945 from February to October (the war ended in August). It turned out to be a surprisingly modest transition to a peacetime economy. Unemployment rose substantially in the postwar period from 670 thousand workers in 1944 to 1.04 million in 1945, and to 2.27 million in 1946. However, forecasts for unemployment increases of about 8 million did not materialize.⁵ In 1946 and 1947, real GDP declined by 11 percent and 1 percent, respectively. The sharp drop was due entirely to the demobilization and concomitant plunge in defense outlays. In contrast, the private sector and civilian government components of the GDP rose during the demobilization. Because the “recession” in 1946 was sui generis due to the conversion from war to a peacetime economy, it was not considered a recession period by the NBER Business Cycle Dating Committee.

While “expansion” is the general term for the upward phase of the cycle, the upturn immediately following a recession, until the economy regains its previous peak level of activity, is often referred to as “recovery.” The period that starts when economic activity begins to exceed the highest levels attained in the previous expansion is traditionally called “expansion.” An analogous designation that the author makes with respect to the downward phase is the transition from recession to contraction. The immediate downturn is called “recession”; and if overall activity falls below the lowest level of the previous recession, the depressed period is called “contraction.” However, such a contraction has not occurred since the depression of the early 1930s, when economic activity at the low point of the depression in March 1933 was below that at the low point of the previous recession in November 1927, and so “recession” and “contraction” are used interchangeably in current terminology.

The high point of an expansion before it turns downward to recession is called the “peak,” and the low point of a recession before it turns upward to recovery is the “trough.” A complete cycle is composed of both the expansion and recession phases and is typically viewed from the peak of one expansion to the peak of the following expansion. This way of looking at the cycle emphasizes the long-term growth of the economy independent of short-term cyclical movements, although for some analyses it may be useful to measure the cycle from the trough of one recession to the trough of the next recession, which is also a complete cycle.

The last term used in this categorization is “depression.” A depression is a collapse of the economy such as last occurred in the 1930s. It involves a general breakdown of economic life affecting people in all social and economic strata, including mass unemployment, widespread loss of assets such as homes and life savings, the disappearance of established businesses through bankruptcy, and an overall undermining of the financial system through failures of the banking, securities, and insurance industries. A depression is far more devastating than a recession. For example, unemployment reached a high of about 25 percent in the 1930s, compared with peaks of 9 percent and 11 percent during the severe recessions of 1973–75 and 1981–82, respectively.

Figure 1.1 shows business cycle recessions, recoveries, and expansions from 1958 to June 2003. The recession periods are those designated by the NBER Business Cycle Dating Committee. The coincident index of the leading indicator system represents actual production (chapter 14 details the system). The cyclical turning points of the coincident index approximate, and often are the same as, the NBER Dating Committee turning points. As noted above, the committee bases its designation of cyclical turning points on a judgment of the movements of a variet...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Tables and Figures
• Preface
• 1 • Attributes of Economic Indicators
• 2 • Framework for Macroeconomic Analysis and Policies
• 3 • Economic Growth
• 4 • Household Income, Saving, and Expenditures
• 5 • Business Profits, Nonresidential Investment, and Housing
• 6 • Government
• 7 • The United States in the World Economy
• 8 • Employment, Worker Income, and Employer Costs
• 9 • Unemployment
• 10 • Productivity
• 11 • Inflation and Deflation
• 12 • Finance
• 13 • Leading Indicator System
• 14 • Noneconomic Intangibles
• References
• Index