The National Bureau of Economic Research — a private, nonprofit research organization that determines business cycles — concluded on a conference call Friday that the economic expansion that started in November 2001 had ended. The previous period of economic expansion, which ended in 2001, lasted a decade.
The NBER does not define a recession as two consecutive quarters of decline in real gross domestic product, as is a general rule in many countries. Instead, it looks for a decline in economic activity, spread across the economy and lasting more than a few months.
The current downturn was particularly tricky to define because GDP remained positive in the first half of this year. The NBER said its committee looked at payrolls, which peaked in December 2007 and declined in every month since then, as well as real GDP and other data to determine when the recession started.
“The committee determined that the decline in economic activity in 2008 met the standard for a recession,” the NBER said in a statement. “All evidence other than the ambiguous movements of the quarterly product-side measure of domestic production confirmed that conclusion.”
After last week’s rally, U.S. stock markets sank in early trading Monday and then erased most of last week’s gains by the end of the day, with financial services companies and retailers among Wall Street’s biggest casualties.
The Dow Jones industrial average was down 679.95 points, or 7.70 percent, to end unofficially at 8,149.09. The Standard & Poor’s 500 Index was down 80.05 points, or 8.93 percent, to finish unofficially at 816.19. The Nasdaq Composite Index was down 137.50 points, or 8.95 percent, to close unofficially at 1,398.07.
The current recession, which many economists expect to persist through the middle of next year, is already the third-longest since the Great Depression, behind only the 16-month slumps of the mid-1970s and early 1980s, Reuters reported.
“I think that we’ve got a ways to go, that this is going to be probably a deep and long recession,” Jeffrey Frankel, a Harvard University economist who sits on the NBER’s committee, told CNBC. “It could be the worst post-War recession. We don’t know yet.”
The White House commented on the news that a second downturn has officially begun on the Bush administration’s watch without ever actually using the word “recession” — a term the president and his aides have repeatedly avoided. Instead, spokesman Tony Fratto remarked upon the fact that NBER “determines the start and end dates of business cycles.”
“What’s important is what is being done about it,” Fratto said. “The most important things we can do for the economy right now are to return the financial and credit markets to normal, and to continue to make progress in housing, and that’s where we’ll continue to focus.”
President George W. Bush is the first president since Richard Nixon to preside over two recessions. The U.S. economy also dipped into a recession from March through November 2001, according to NBER.
Lawrence Summers, tapped by President-elect Barack Obama to become director of the White House National Economic Council, said the slump may be worsening.
“While the economy has already lost 1.2 million jobs this year, recent economic evidence suggests that the pace of this downturn is accelerating. That is why President-elect Obama has set as his top priority passing an economic recovery plan,” Summers said in a statement.
Mr. Obama has instructed his economic team to come up with recommendations for a stimulus package that would include a mix of middle-class tax cuts and spending on infrastructure projects like roads and bridges and investments in renewable energy.
President-elect Obama has not offered a price tag yet for his proposed stimulus but indicated it would be large.
Several key Democratic lawmakers said the NBER’s pronouncement underscored the urgent need for another dose of government spending to kick-start the economy.
“The announcement simply makes official what we have long known — with rising costs of living, rising unemployment, record foreclosures and depleted savings, we must do more to help families make ends meet,” Senate Majority Leader Harry Reid said in a statement.
Also on Monday, Federal Reserve Chairman Ben Bernanke said further interest rate cuts are possible but he cautioned that there were limits to how much such action will be able to revive an economy expected to remain weak well into next year.
“Although further reductions … are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited,” Bernanke said in a speech to business executives in Texas. The Fed is widely expected to cut a key interest rate when officials next meet on Dec. 15-16.
Treasury Secretary Henry Paulson also said Monday the administration is looking for more ways to tap a $700 billion financial rescue program and will consult with Congress and the incoming Obama administration.
Paulson says the program has distributed $150 billion out of the $250 billion earmarked to buy stock in banks as a way to boost their resources so they can lend more.
He says the administration is looking at other ways to utilize the rescue package, including alternatives for providing capital to financial institutions.
The NBER is well known for taking its time in declaring when recessions begin. The group did not declare March 2001 as the start of a recession until November of that year, which the group later pegged as the end of the downturn.
Economists polled by Reuters expect the U.S. economy to contract in the first half of 2009, and then grow modestly in the latter part of the year. If the economy continues to contract through June, this would most likely rank as the longest recession since the 1930s.