Most investors are familiar with the conventional definition of an economic recession. It’s defined as two consecutive quarters of declining GDP combined with rising unemployment and a few other technical factors. But investors may not be as familiar with two other aspects of recession timing.
The first is the exact body that makes the determination, and the second has to do with the timing of that body’s announcements. The group that “officially” decides when the U.S. economy is in a recession is called the National Bureau of Economic Research (NBER) based in Cambridge, Massachusetts, although there’s nothing official about what they do. NBER is a private nonprofit think tank that receives substantial input from scholars at Harvard and MIT, but it is not a government agency. Their decisions on the start and finish of recessions are not technically “official,” but they are widely accepted by Washington, the Fed and Wall Street.
Less well known is the fact that recessions are not called by NBER until well after they have begun. In this respect, NBER looks backward at the data rather than forward like a forecasting firm. On occasion, the NBER might not identify the start date of a recession until nine months or a year after the recession began. By that method, the U.S. could be in a recession next month and we would not know about it until a year from now when the data were all in.
This article is a timely reminder that analysts have to look for signs of a recession wherever they can find them and not wait for NBER to make its determination. The fact that pending home sales have dropped five months in a row is not by itself a definitive sign of a recession, but it’s certainly a worrying trend.
Many other signs are appearing on the horizon also as the Fed continues to raise rates and destroy money by reducing their balance sheet. Don’t be surprised if we wake up a year from now only to find the NBER says the recession began in July 2018. Investors need to be ready today for this possibility.
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