Prominent Wall Street economists like Mark Zandi, investing luminaries like ARK Invest’s Cathie Wood and executives like JP Morgan Chase CEO Jamie Dimon can make recession predictions until they’re blue in the face, but their guidance will remain just that — an economic forecast.
That’s because, in the United States, the economy isn’t broadly and officially considered to be in a recession until a relatively unknown group of eight economists says so.
The economists, who serve together as the Business Cycle Dating Committee,are hand-selected by and work under the umbrella of the National Bureau of Economic Research (NBER), a private nonprofit organization. They have no predetermined meeting dates and their deliberations are private. There are no fixed term dates and the final determination of who gets to serve on the committee is made by one man: NBER president and Massachusetts Institute of Technology economist James Poterba.
There is a clear lack of racial diversity amongst the eight members, and NBER has never had a member who has been a racial minority, according to Gary Hoover, co-chair of the American Economic Association Committee on the Status of Minority Groups in the Economics Profession.
All NBER members are experts in macroeconomics and business cycle research. Each is over 60 years old, and they are all associated with prestigious universities. The group includes two women, one of whom is married to another member.
The NBER’s recession designations are used and accepted exclusively by the US government, businesses, investors and journalists.
I shall not attempt to define recession, but I know it when I see it
While a recession is commonly defined by two consecutive negative quarters of gross domestic product growth, there’s no steadfast rule governing what defines a recession in the United States.
Instead, the Dating Committee abides by a relatively vague definition that allows for wiggle room: A recession, they write, “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
The committee also takes its time in defining when a recession begins and ends, making sure to look at data on a broad timeline. The designations often come retroactively — which means the US could currently be in the middle of a recession without anyone officially recognizing it until after the fact.
For example, inflation is at a 40-year high, the US economy contracted during the first quarter of the year, stock markets are on the brink of their worst half-year performance since 1932 and consumer sentiment has plummeted, but there is no guidance on when the committee will next meet and what they will decide.
The group says it takes a wide look at economic indicators — real personal income less transfers, nonfarm payroll employment, real personal consumption expenditures, wholesale retail sales adjusted for price changes, employment as measured by the household survey, and industrial production. But there is no fixed rule about which measures they use in their process or how they are weighted in the committee’s decisions.
The short-lived, Covid-induced recession in 2020, for example, only hadone quarter of negative growth. But “the committee concluded that the subsequent drop in activity had been so great and so widely diffused throughout the economy that, even if it proved to be quite brief, the downturn should be classified as a recession.”
With so much focus on the state of the economy, and so many official sources looking to one group to determine whether the United States has entered a downturn, NBER has an outsized role influencing American politics, policy and financial decision-makers.
“There’s an awful lot of symbolic value attached to whether we’re in a recession,” said Richard Wolff, professor of economics emeritus at the University of Massachusetts, Amherst. “It is taken seriously up on the Hill and by policy makers across the country, it’s important.”
But Wolff finds that even professional economists don’t know where the official recession designationcome from: “It’s one of those mysteries that isn’t inquired into because people have accepted these things as gospel — the rulings just seem to come down from on high.”
In recent years, however, critics have said the NBER’s recession and expansion determinations fail to consider the economic state of many underrepresented Americans.
A lack of inclusion
The NBER says the last recession ended in April 2020 but the recovery was two-pronged, something that the Department of Labor designated as “K-shaped”: sharp growth for the affluent and stagnant for the less well-off.
“Analysis of private data from various sources appears to bear out that low-wage workers have borne the brunt of the pandemic induced recession,” they wrote.
The Department of Labor found that while workers making over $60,000 had returned to pre-pandemic employment levels by August of 2020, low-wage workers’ levels of employment were still down about 40%.
Low-wage workers, the Department of Labor concluded, would likely feel the impact of long-term earnings reductions, weakened savings and increased inequality for years to come.
When economists and policymakers look to study previous recessions, they will be using dates that “don’t necessarily represent the full breadth of experiences in this country,” said Valerie Wilson, who is director of the Economic Policy Institute’s Program on Race, Ethnicity, and the Economy as well as president of the National Economic Association. “More diversity on the committee will bring in perspectives and other ideas about how we understand the health of the economy.”
In recent years there has been a push by policymakers and the Biden administration to include more diverse thinking in economic analysis.
Janet Yellen, America’s first woman Treasury secretary and its first woman Fed chair, has argued that the lack of women and minority economists at the Federal Reserve and the federal government is a top priority. That lack of diversity, she said, skews viewpoints and limits the issues of discussion.
Increased scrutiny and discussion about representation has focused on the Federal Reserve board of governors, on which Lisa Cook became the first Black woman to serve last month. But the NBER, which is a private institution that receives government funding and works closely with former, future and present government officials, has largely avoided criticism.
There should be more focus on an organization that “makes significant policy decisions,” said Wilson. “They should look beyond topline numbers,” she said.
Economists’ diversity problem
The NBER doesn’t have to contend with public attention the way the federal government does, so it’s a much more insular community. Those outside of that community know very little about its inner workings, said Wilson — and those who do push back are “extremely underrepresented minorities who have less power.”
“I think the economics profession is notorious for being one of the least-diverse professions or disciplines along a number of lines: racial, gender and diversity in schools of thought,” added Wilson.
It’s difficult to break through and get people to consider new frameworks for how we understand disparity and inequality. This creates an unbreakable cycle as storied economists lead editorial boards of peer-reviewed journals. Getting published in those journals is essential to receiving tenure at the universities that the government and organizations like NBER recruit from.
“It’s incestuous,” said Wolff, who attended Harvard University undergrad, received his Master’s degree at Stanford and his PhD in economics at Yale, where he was a classmate ofYellen’s.
“Fundamental issues that ought to be part of the conversation in our economic system are excluded as if they don’t exist,” said Wolff. “You have a community of old, White graduates from the same elite institutions and what they think is important is important. If you think differently, you’re out of the club.”
Wolff said he’s benefited greatly from being a “poster boy” of the charmed inner circle of economists that he calls an old-boy network -— but that “someone has to be the one that says the emperor is naked.”
The NBER declined to comment on the diversity of its economists but did confirm that the current members of the Business Cycle Dating Committee are Robert Hall of Stanford University; Robert J. Gordon of Northwestern University; James Poterba of MIT; Valerie Ramey of University of California, San Diego; Christina Romer of University of California, Berkeley; David Romer of University of California, Berkeley; James Stock of Harvard University; and Mark W. Watson of Princeton University.
