NBER Declares Official Recession

As the financial system has collapsed over the past year, everyone from policymakers to media commentators has fretted about whether or not the crisis would spillover into the broader economy. Yesterday, the fears were confirmed when the Cambridge-based National Bureau of Economic Research officially declared that the U.S. economy is in a recession, and has been for nearly a year.

The bureau’s seven-member Business Cycle Dating Committee, which is officially charged with determining when the U.S. is in a recession, announced yesterday that the last peak in economic activity occurred in December 2007, marking that month as the start of the current recession.

The committee pinpointed the month when U.S. growth dipped into negative territory by using monthly indicators including gross domestic product and consumption measures, most of which have plunged in recent months.

MIT economics professor James M. Poterba ’80, the president of the NBER and a member of the business cycle committee, said yesterday that payroll employment is the strongest indicator in determining the highest point of economic activity.

The measure reached a peak last December and has declined every month since then.

“This doesn’t provide new information on where the economy is at this moment,” Poterba said. “This is really a determination of the turning point—and we don’t know when the next turning point may be.”

The announcement marks the first official recession since 2001, when the economy took a hit after the dot-com bubble burst.

Since the announcement did not come as a surprise—many economists have been warning of a recession for months—Poterba said he thought that the psychological consequences of the official declaration would be modest.

Though there was a broad selloff in the stock market yesterday, including a nearly 700 point decline in the Dow Jones Industrial Average, Harvard Kennedy School professor Jeffrey A. Frankel, who is also on the committee, said that he does not think the announcement was responsible.

Though the committee does not recommend steps to pull the nation out of the recession, Poterba, Frankel, and committee member Robert E. Hall of Stanford said that policies should be aimed at creating a large stimulus to aid the ailing economy.

“Many people are saying across the political spectrum that a good-old fashioned stimulus is what we need in the short term,” Frankel said. “I think it’s very important that [fiscal policies] be well targeted and well designed and do the minimum damage to the long-term fiscal health.”

But Frankel cautioned policymakers not to repeat the mistakes of the 2001 Bush tax cuts, which Frankel said have resulted in “maximum damage to income distribution.”

“I hope tax cuts are better targeted than that,” Frankel said. “It should be possible to give a lot of fiscal stimulus in the short term without locking in a fiscal disaster for the long term.”

—Staff writer June Q. Wu can be reached at junewu@fas.harvard.edu.