The Beginning and End of the 2007-2009 Recession

The Beginning and End of the 2007-2009 Recession

The Figure shows the real time probabilities of recession from the Dynamic Factor Model with Regime Switching (Chauvet 1998). The probabilities indicate that the U.S. recession started in December 2007. Using payroll employment as one of the four coincident variables, the recession would have been confirmed as of April 2008, while using civilian employment instead, the recession would have been confirmed as of August 2008. The NBER only announced that the recession began in December 2007 twelve months later, in December 2008.

The model indicates that December 2007 is the beginning of the recession.

As of January 2010, the NBER has not announced the end of the recession. Knowing that the recession is over or not has important implications for economic policy, and economic decisions by firms and individuals.

The probability of recession for the month of June is 58.3%, using information available in August 2009. This probability drops to 39.5% for July 2009 using information available in September 2009. In order to obtain an assessment of the trough, one can examine the relationship between the trough decisions by the NBER and the probabilities from the model for the past recessions. With the exception of the 1990-1991 recession, the NBER trough occurred when the probabilities were decreasing, but were still above 50%. According to the NBER, a trough is a month in which a recession ends and an expansion starts at the same time.

Thus, the model indicates that this last U.S. recession ended in June or July 2009.

Notice that this conclusion is not based on forecasts, but on available information on the several coincident economic variables used by the NBER.