Edward Renshaw
Professor of Economics
State University of New York at Albany
Any method of trying to identify recessionary peaks before their occurrence is highly suspect since inflationary shocks are hard to predict in advance of their occurrence and because changes in the character of the US economy may have made it more recession proof. The data in Table 13.1 on the business cycle expansions and contractions from 1854-91 would strongly suggest, however, that business expansions are lasting longer than they used to and that economic contractions are shorter than they once were.
The five longest expansions in business cycle history have all occurred since the horrendous 43 month contraction in economic activity which lasted from August 1929 to March 1933. And the current business expansion is already adding to the average duration of the ten expansions which have occurred since the end of World War II.
In Essay 12 it was noted that there have been a number of developments which may have helped to stabilize the inflation rate and lessen the need for extreme increases in the federal funds rate that might tip the economy into a recession. In this essay we will examine some changes in the labor market which may have also helped to extend the life of the business expansions
The evidence in support of a more stable economy that might spill over and help to prolong the current business expansion is most apparent when one examines cyclical fluctuations in nonagricultural payroll employment, and its major components: employment in goods producing industries and service industries. Since the mild recession of 1960-61 employment recessions have been largely confined to layoffs in goods producing industries. See Table 13.2.
The good news with regard to employment in manufacturing is that automation and other improvements in productivity have reduced the share of total employment in goods producing industries by more than 50 percent since the post World War II peak in 1953. From March 1980 to December 1995 there was actually a net reduction in the number of persons classified as being employed in goods production at a time when the total output of goods produced in the United States is estimated to have increased by about 50 percent.
The shrinking share of nonsupervisory workers in recession prone, goods producing industries has helped to moderate recent employment recessions in comparison to those which occurred from 1948-58. The expense of automating has also made it more advantageous for some industries, such as the automobile industry, to offer rebates rather than cut production and lay off skilled workers when consumer demand is weak. This should help to stabilize the demand for motor vehicles and lengthen business expansions.
Since the mild and rather unexpected recession of 1960-61 employment in goods producing industries has usually peaked at least four months in advance of the recessionary peaks identified by NBER. The only exception, so far, is a one month lag after the recessionary peak of November 1973 when peace time wage and price controls were still in effect and the Fed was apparently hoping that the inflationary shock resulting from crop failures in the Soviet Union and other parts of the world would soon moderate. See Table 13.3. A failure on the part of the Board of Governors to raise short term interest rates as rapidly as the consumer price index during the last half of 1973 encouraged many people to invest in new houses and other types of durable goods rather than have the purchasing power of their savings diminished by inflation while on deposit in commercial banks and other types of thrift institutions.
The 18 month lead time for goods producing employment before the July 1990 peak in business activity was probably one of the factors that encouraged the Board of Governors to lower the federal funds rate by 1.70 percentage points between March 1989 and July 1990. While the reduction in short term interest rates wasn't sufficient to prevent the employment recession of 1990-92, there is a possibility that this recession wouldn't have occurred if it weren't for the oil price shock and economic uncertainty associated with Iraq's invasion of Kuwait in August 1990.
One of the most impressive differences between the current business expansion and earlier expansions is that many corporations have been reducing the number of their employees throughout the expansion. When the US economy does get caught up in another recession, some of these companies may discover that they no longer have very many employees that can be laid off.
The civilian unemployment rate, is one of the most widely publicized cyclical indicators. It is classified as being a leading economic indicator at recessionary peaks and a lagging indicator at recessionary troughs. Since the mild recession of 1960-61 the US economy has either experienced a recessionary peak or been mired down in a recession after a cumulative increase in the civilian unemployment rate amounting to .6 percentage points or more. See Table 13.4. The comparatively long unadjusted lead times for the three completed business expansions lasting more than 50 months (the business expansions of 1961-69, 1975-80 and 1982- 90), however, may mean that the Fed will be in a better position to take actions that will prolong the current and future business expansions or at least ameliorate the recessions that do occur.
Increases in the civilian unemployment rate during the nine recessions from 1947 to 1994 ranged from lows of 2.2 percentage points for the short- lived recession of 1980 to a high of 4.5 percentage points for the 1948-49 recession. The highest unemployment rate in the post World War II period was 10.8 percent for December 1982 and can be compared to an average unemployment rate of 24.9 percent for all of 1933.
While the emphasis in this essay has been on changes in the character of the labor market which may have helped to make the US economy more recession proof one can also make the same case using other types of information.
An aging population supported by social security and other types of transfer payments that are not reduced during recessions has made the consumption of proportionately more households oblivious to their occurrence.
Rising imports have shifted some of the cost of a slump in goods demand to other countries and bolstered the demand for U.S. exports. If the economies of other countries are not fully synchronized with what is happening in the U.S. the rising share of imports and exports should have a stabilizing effect on both the U.S. economy and world wide output.
Residential construction is one of the most volatile sectors of the US economy but may not destabilize economic activity as much in the future, as it has in the past. In 1950, 7.15 percent of real GDP was allocated to this sector. During the housing boom of 1972, when almost a quarter of a million more housing units were started than in 1950, residential construction had slipped to only 6.06 percent of GDP and during the more recent rapid growth year of 1994 residential construction was only equal to 4.07 percent of GDP.
Changes in business inventories are another volatile component of GDP that have been closely linked to recessions. Just-in-time delivery of parts and computerized management of business inventories, however, have reduced some of the instability caused by wide fluctuations in inventory investment. During the economic recession of 1982 the inventory/sales ratio for manufacturing and trade peaked out at 1.67. By 1994 it had sunk to a post 1954 low of only 1.39.
The consumption of services is the most stable component of GDP. Since 1950 its share of the economy has increased from 26.7 percent to 38.1 percent in 1994. See Table 13.5 for a recessionary overview of real GDP and some of its components. Gross private domestic investment (GPDI) has the distinction of being the most recession prone component of real GDP. Since the food and oil price shock recession of 1973-75, when real GDP declined by 3.6 percent, the decline in GPDI has drifted downward from 28.9 percent to only 15.3 percent for the 1990-91 recession.
Friedman and Schwartz (1963) have noted that before the great depression of the 1930s it was widely accepted that the business cycle was a monetary phenomenon as exemplified by Irving Fisher's (1923) article titled, "The Business Cycle Largely a 'Dance of the Dollar'".
After the publication of The General Theory of Employment, Interest and Money in 1936, however, the role of money was downgraded in favor of a Keynesian interpretation of the business cycle. In the third edition of Paul Samuelson's textbook on Economics it was noted, "All modern economists are agreed that the important factor in causing income and employment to fluctuate is investment."
The absence of prolonged recessions in the early post World War II period and the painstaking research of Friedman and Schwartz in the late 1950s and early 1960s, however, led to a revival of interest in monetary economics. They were able to show that changes in the growth rate for the stock of money have leading indicator properties that were closely associated with the peaks and troughs in economic activity identified by National Bureau of Economic Research from 1867-1960.
Changes in the inflation adjusted value of the more conventional money, M1, have continued to do a remarkably good job of identifying economic recessions before they occurred. M1 expressed in 1982 dollars turned down at least 9 months before each of the last nine recessions and experienced a cumulative decline of 1.5 percent at least five months before each of these recessions (Renshaw 1992, Table 1.80).
In January 1995 real M1 was estimated to have experienced another decline of over 1.5 percent. If history repeats itself the US economy can be expected to slip into another recession no later than September 1997.
The relationship between money and such indicators of economic activity as industrial production and gross domestic product, however, has never been very stable. Institutional changes permitting the payment of interest on demand deposits and the associated proliferation of 'near monies' in the early 1980s caused 'other checkable deposits', which are now included in M1, to increase so rapidly in 1985 and 1986 that the Federal Reserve's Open Market Committee elected not to establish a specific target range for M1 in 1987 because of uncertainties about its underlying relationship to the behavior of the economy.
In the summary report of the Federal Reserve Board on February 19, 1987 it was suggested that "with the deregulation of deposit rates, and the attendant changes in the composition of M1, the narrow money measure has become much more responsive in the short run to changes in interest rates, and possibly to other factors affecting the portfolio decisions of households."
In a world where rapid recoveries from an economic recession may be a non recurring phenomenon, however, there is a possibility that changes in the M1 growth rate may still be of some value in helping to forecast what will happen to the growth rate for real GDP.
In Table 13.6 declines of more than one percentage point in the December-December growth rate for M1, November- November declines in residential building permits of 14.6 percent or more and November-November increases in initial claims for unemployment insurance of 22 percent or more are used to help identify poor following year growth rates for the US economy. When two or more of these indicators were pointing in the direction of a poor growth year, the US economy was usually experiencing an economic recession. The only exception (so far) was the "slow growth year" which occurred after the Vietnam war build-up year of 1966. This false signal also has the distinction of being the only poor growth forecast that was not preceded by at least a modest increase in unemployment claims.
The evidence in support of an economy that is more stable from a forecasting point of view is vividly illustrated by the error terms associated with forecasts based on the median growth rate for real GDP for the five preceding same case (2* or other case) outcomes. Since 1984 there has only been one error term amounting to one percentage point or more for this forecasting system in spite of numerous declines in the M1 growth rate in excess of one percentage point.
One of the nice things about the forecasts and conclusions pertaining to economic stability that can be inferred by examining Table 13.6 (and most of the other tables in this Handbook) is that they can be quickly updated on the basis of information in the appendix to the Economic Report of the President.
In so doing one should eventually be in a better position to answer the question, has M1 ceased to be of any value for forecasting purposes or will its behavior come back to haunt us?
Fisher, Irving (1923). "The Business Cycle Largely a 'Dance of the Dollar,'" Journal of the American Statistical Association, (December), 1024-28.
Friedman, Milton and Anna Schwartz (1963). "Money and Business Cycles," Review of Economics & Statistics, 45(February), 32-64.
Renshaw, Edward (1992). The Practical Forecasters' Almanac(Burr Ridge, Illinois: Irwin Professional Publishing).
Business Cycle Reference Dates ----Duration in Months----
Trough Peak Contraction Expansion
Previous Peak Trough to
to Trough Peak
Dec. 1854 June 1857 ...... 30
Dec. 1858 Oct. 1860 18 22
June 1861 Apr. 1865 8 46*
Dec. 1867 June 1869 32 18
Dec. 1870 Oct. 1873 18 34
Mar. 1879 Mar. 1882 65 36
May 1885 Mar. 1887 38 22
Apr. 1888 July 1890 13 27
May 1891 Jan. 1893 10 20
June 1894 Dec. 1895 17 18
June 1897 June 1899 18 24
Dec. 1900 Sep. 1902 18 21
Aug. 1904 May 1907 23 33
June 1908 Jan. 1910 13 19
Jan. 1912 Jan. 1913 24 12
Dec. 1914 Aug. 1918 23 44*
Mar. 1919 Jan. 1920 7 10
July 1921 May 1923 18 22
July 1924 Oct. 1926 14 27
Nov. 1927 Aug. 1929 13 21
Mar. 1933 May 1937 43 50
June 1938 Feb. 1945 13 80*
Oct. 1945 Nov. 1948 8 37
Oct. 1949 July 1953 11 45*
May 1954 Aug. 1957 10 39
Apr. 1958 Apr. 1960 8 24
Feb. 1961 Dec. 1969 10 106*
Nov. 1970 Nov. 1973 11 36
Mar. 1975 Jan. 1980 16 58
July 1980 July 1981 6 12
Nov. 1982 July 1990 16 92*
Mar. 1991 8
Average, peacetime cycles
1854-1982 (25 cycles) 19 27
1854-1919 (14 cycles) 22 24
1919-1945 (5 cycles) 20 26
1945-1982 (6 cycles) 11 34
*Business expansions which may have been prolonged or shortened by wars (Civil War, World Wars I and II, Korean War, Vietnam War and Operation Desert Storm).
Source: National Bureau of Economic Research, Inc.
Payroll Employment Percentage Changes
Date of ------------------------ ------------------------- Share of
Employ. Total Goods Service Total Goods Service Total Emp.
Peaks & Indust. Indust. Employ. Indust. Indust. Goods Ind.
Troughs (Thousands of Employees) (Percent)
Sep. 48 45,162 18,916 26,246 41.9
Oct. 49 42,805 16,777 26,028 -5.2 -11.3 - .8
June 53 50,389 21,279 29,110 42.2
Aug. 54 48,643 19,419 29,224 -3.5 - 8.7 .4
Mar. 57 53,062 21,271 31,791 40.1
May 58 50,770 19,159 31,611 -4.3 - 9.9 - .6
Apr. 60 54,634 20,716 33,918 37.9
Feb. 61 53,380 19,558 33,822 -2.3 - 5.6 - .3
Mar. 70 71,347 24,202 47,145 33.9
Nov. 70 70,296 22,707 47,589 -1.5 - 6.2 .9
Oct. 74 78,569 24,582 53,987 31.3
Apr. 75 76,298 22,335 53,963 -2.9 - 9.1 - .0
Mar. 80 90,995 26,307 64,688 28.9
July 80 89,676 25,042 64,634 -1.4 - 4.8 - .1
July 81 91,410 25,630 65,780 28.0
Nov. 82 88,649 22,964 65,685 -3.0 -10.4 - .1
June 90 109,911 25,034 84,877 22.8
Feb. 92 108,067 23,250 84,817 -1.7 - 7.1 - .1
Dec. 96 120,700 24,348 96,352 20.2
Source of basic data: Economic Report of the President.
Date of Goods Employment Lead Times From NBER
------------------------- ------------------ Peaks in Months
Goods Goods NBER Own NBER --------------------
Employ. Employ. Peak Peak Peak Unadjusted Adjusted
Peak Down 1% ----Thousands-----
(1) (2) (3) (4) (5) (6) (7)n
Sep. 48 Dec. 48 Nov. 48 18,916 18,794 - 2 + 1
Apr. 53 Sep. 53 July 53 21,304 21,266 - 3 + 2
Dec. 56 July 57 Aug. 57 21,291 20,942 - 8 - 1
Feb. 60 Mar. 60 Apr. 60 20,903 20,716 - 2 - 1
July 69 Jan. 70 Dec. 69 24,495 24,354 - 5 + 1
Dec. 73 July 74 Nov. 73 25,264 25,214 + 1 + 8
July 79 Mar. 80 Jan. 80 26,606 26,448 - 6 + 2
Mar. 81 Nov. 81 July 81 25,654 25,630 - 4 + 4
Jan. 89 May 90 July 90 25,361 24,949 -18 - 2
Dec. 96 ? ? 24,348 ? ? ?
(7)n. Months from the NBER peak date in column (3) to the date in column (2) when goods employment was down one percent or more from its own peak.
Source of basic data: The Survey of Current Business, January 1995 and more recent issues.
Unemployment Rate Lead Time
Unemploy. U up .6% Unemploy. Business ---------------- (in Months)
Trough Points Peak Peak Trough Peak Total Adjusted
(1) (2) (3) (4)n
Jan. 1948 Mar. 1948 Oct. 1949 Nov. 1948 3.4 7.9 -10 -8
Jun. 1953 Oct. 1953 Sep. 1954 July 1953 2.5 6.1 - 1 +3
Mar. 1957 Jun. 1957 July 1958 Aug. 1957 3.7 7.5 - 5 -1
Jun. 1959 Oct. 1959 Nov. 1959 --- 5.0 5.8 -10 -6
Feb. 1960 Mar. 1960 May 1961 Apr. 1960 4.8 7.1 - 2 -1
May 1969 Feb. 1970 Aug. 1971 Dec. 1969 3.4 6.1 - 7 +2
Oct. 1973 Feb. 1974 May 1975 Nov. 1973 4.6 9.0 - 1 +3
May 1979 Jan. 1980 July 1980 Jan. 1980 5.6 7.8 - 8 0
July 1981 Oct. 1981 Dec. 1982 July 1981 7.2 10.8 0 +3
Mar. 1989 Aug. 1990 June 1992 July 1990 5.0 7.7 -16 +1
Oct. 1996 5.2p
(4)n. Months from the business peaks identified by NBER after the civilian unemployment rate has reversed itself on the upside by at least .6 percentage points after experiencing a trough.
p represents a preliminary estimate that may turn out to be too high.
Source of Data: Economic Report of the President.
Year Consumption Expenditures Government Purch.
-------------------------- ----------------
and Real Durable Non. D. Services GPDI Fed State &
Qtr. GDP Goods Goods Local
48-4 1,316.4 74.3 386.6 361.6 226.9 136.8 117.7
49-4 1,301.9 83.3 391.6 361.3 184.5 136.8 135.2
% Change -1.1 12.1 1.3 - .1 -18.7 .0 14.9
53-2 1,695.3 93.3 445.2 424.9 246.6 346.9 147.5
54-2 1,658.4 94.0 444.1 438.8 226.5 297.7 159.9
% Change -2.2 .8 - .2 3.3 -8.2 -14.2 8.4
57-3 1,851.2 106.8 500.0 500.6 273.8 278.8 189.9
58-1 1,790.1 102.0 492.2 508.0 234.4 267.8 198.8
% Change -3.3 -4.5 -1.6 1.5 -14.4 -3.9 4.7
60-1 2,283.3 104.5 612.1 711.0 308.1 345.0 259.9
60-4 2,229.1 103.2 615.4 724.3 230.5 354.5 273.0
% Change -2.4 -1.2 .5 1.9 -25.2 2.8 5.0
69-3 3,404.3 193.2 839.1 1,115.5 464.5 459.8 429.3
70-1 3,378.1 188.7 853.1 1,141.8 421.8 439.7 432.5
% Change - .8 -2.3 1.7 2.4 - 9.2 -4.4 .7
73-4 3,936.2 248.8 941.3 1,333.0 599.9 363.6 485.5
75-1 3,793.6 225.4 919.1 1,377.6 426.3 368.5 508.8
% Change -3.6 - 9.4 -2.4 3.3 -28.9 1.3 4.8
80-1 4,674.3 299.3 1,076.1 1,663.0 686.1 395.1 553.2
80-3 4,559.6 278.2 1,058.6 1,672.8 569.1 399.3 538.6
% Change -2.5 - 7.0 -1.6 .6 -17.1 1.1 -2.6
81-3 4,758.4 292.8 1,074.0 1,700.8 709.1 418.1 528.2
82-3 4,615.3 283.3 1,080.9 1,729.3 596.8 431.0 530.8
% Change -3.0 -3.2 .6 1.7 -15.8 3.1 .5
90-2 6,174.4 495.4 1,316.9 2,321.1 856.1 543.0 705.4
91-1 6,047.9 458.6 1,300.6 2,325.3 725.5 547.3 715.5
% Change -2.0 -7.4 -1.2 .2 -15.3 .8 1.4
Source of basic data: The Survey of Current Business.
Year Change M1 ---Nov.-Nov % Change--- Following Growth Rate Real GDP
Growth B. Permits Un. Claims 2* Cases Other Cases
1948P -5.8* -26.6* 22.7* .4
1949 1.1 64.6 60.3* 8.7
1950 4.8# -12.8 -41.9 9.9
1951 1.1# -26.4* 5.0 4.3
1952 -1.8* 28.9 -19.5 3.7
1953P -2.7* -14.7* 76.3* - .7
1954 1.6 35.9 - 7.4 5.6
1955 - .5 -20.9* -22.1 2.0(-3.6)
1956 - .9 -12.9 3.7 1.9(-2.4)
1957P -2.0* - 5.5 43.5* - .5
1958 4.5 51.5 - 2.8 5.5( 1.8)
1959 -3.2* -24.9* 12.9 2.2
1960P -1.2* - 8.5 9.7 2.1(-1.6)
1961 2.7 17.6 -20.8 6.0( 3.9)
1962 -1.4* 7.4 - 2.0 4.3( 2.2)
1963 1.9 5.7 - 7.7 5.8( 3.7)
1964 .9# - 7.7 - 5.1 6.4( .9)
1965 .1 4.2 -19.1 6.4( .6)
1966 -2.3* -43.7* - 1.9 2.6
1967 4.2 70.7 .5 4.7(-1.3)
1968 1.1 10.7 - 9.1 3.0(-2.8)
1969P -4.4* -17.1 11.1 .0(- .4)
1970 1.8 26.1 52.6* 3.3(-2.5)
1971 1.4 38.4 -12.1 5.4( .7)
1972 2.7 5.7 -14.8 5.7( 1.0)
1973P -3.7* -37.3* 4.1 - .4(- .4)
1974 -1.1* -44.2* 88.4* - .6(- .6)
1975 .4 41.7 -16.9 5.6( .9)
1976 1.8 38.0 - .8 4.9(- .5)
1977 1.5 15.7 -11.0 5.0(- .4)
1978 .1# - 5.1 - 2.0 2.9(-2.5)
1979 -1.4* -28.9* 23.5* - .3(- .3)
1980P .0 8.3 .5 2.5(-2.5)
1981P .0 -45.9* 27.7* -2.1(-1.8)
1982 1.9 64.2 14.3 4.0(- .9)
1983 1.1 35.6 -38.1 6.8( 2.8)
1984 -3.8* - 2.7 4.2 3.7(- .3)
1985 6.3 3.0 - 6.5 3.0(- .7)
1986 4.6# - 2.8 - 5.4 2.9(- .8)
1987 -13.4* -11.4 -13.7 3.8( .1)
1988 1.4 3.5 - 1.7 3.4(- .3)
1989 -4.0* -10.8 13.4 1.3(-2.1)
1990P 3.1# -30.0* 32.2* -1.0(- .6)
1991 4.7 4.8 - 1.8 2.7(- .3)
1992 5.5 13.5 -14.6 2.3(- .6)
1993 -4.0* 21.4 - 9.1 3.5( .8)
1994 -8.5* - 2.6 - 4.1 2.0(- .7)
1995 -3.9* 6.6 13.7 2.5( .2)
1996 -2.2* - 2.2 -10.7 ?
Footnotes for Table 13.6
The change in M1 growth rate is based on first differences in the December- December Growth Rate for M1. A decline of more than one percentage point is used to signal a poor following year growth rate for real GDP.
B. permits is represented by November-November percentage changes in new private housing units authorized by local building permits. A decline of 14.6 percent or more is used to signal a poor following year growth rate for real GDP.
Un. claims is represented by November-November percentage changes in initial claims for unemployment insurance. An increase of 22 percent or more is used to signal a poor following year growth rate for real GDP.
2* cases where two or more of the recession indicators in the first three columns are signaling a poor following year growth rate for real GDP. The figures in parentheses are error terms obtained by subtracting the median of the preceding five similar case growth rates for real GDP from the actual growth rate.
Other cases where only one or none of the recession indicators in the first three columns are signaling a poor following year growth rate for real GDP. The figures in parentheses are error terms obtained by subtracting the median of the preceding five similar case growth rates for real GDP from the actual growth rate.
# identifies years when there was an increase in the M1 growth rate and a decline in residential building permits. The data in Table 8.5 will enable the reader to verify that these years have all been followed by a positive financial return for the S&P 500 stock price index.
P identifies years containing a recessionary peak in business activity as defined by the National Bureau of Economic Research.
Source of basis data: The differences in the M1 growth rate from 1948-60 are based on data compiled by Friedman and Schwartz in their (1970) Monetary History of the United States. The percentage changes in residential building permits and initial unemployment claims from 1948-94 are from the cyclical indicator section of the October 1995 Survey of Current Business. The remaining numbers are from the 1996 edition of the Economic Report of the President.
Go on to Essay 14:
Return to the Introduction