In March 1929, the National Bureau of Economic Research published its first estimate of the start and end dates of what it called “contractions” or “recessions,” going back to 1855. The private think tank, then based in New York, continued to assign dates to peaks and troughs of the U.S. business cycle in subsequent years, while the NBER researcher who compiled the first set went on to design a system of national income accounts for the Commerce Department. In 1942 Commerce supplemented these for purposes of better understanding the wartime economy with a measure called gross national product, with regular quarterly reporting of GNP beginning in 1947.
If you’ve been wondering why recessions in the U.S. are more or less officially determined by a panel of economists at NBER and not, as in many countries, by the simple rule-of-thumb of two consecutive quarters of declining real gross domestic product (which supplanted GNP as the headline economic growth metric in 1991 in the U.S. and well before then elsewhere), here’s the reason: Some guy at NBER was determining when recessions started and ended before GDP existed, after which he went on to help invent GDP.
The NBER is thus largely responsible for the modern understanding of and nomenclature surrounding the business cycle, as well as some of the measurement apparatus. It may even be partly responsible for the strong political salience of recessions in the U.S., where they have often accompanied or immediately preceded changes in party control of the White House (in contrast to say, Germany, where incumbent Chancellor Angela Merkel won resoundingly in the wake of the Great Recession in 2009). That doesn’t mean its recession determinations are right, especially since the business cycle ceased to be the focus of its research decades ago. But the organization’s pioneering role in determining what recessions are does seem relevant to the discussion over whether we’re in one now.
The NBER was founded in 1920 by a conservative AT&T Inc. executive and a liberal Hickey-Freeman Co. executive who’d been a Socialist Labor Party activist in his younger days. They hoped that better data could resolve some of their economic disputes. The first research director they selected was Wesley Clair Mitchell, a Columbia University economist who bore the external markings of a lefty intellectual—he had been the star student of famed capitalism-critic Thorstein Veblen, lived in Greenwich Village and was married to a famed progressive educator—but was resolutely neutral in his academic work, which centered around the business cycle.
Mitchell offered no grand theories, just the hope that accumulating more and better data about the economy’s ups and downs could increase understanding. At NBER he was able to put smart young researchers to work on this, notably Simon Kuznets, who had emigrated to the U.S. from Ukraine in 1922 and immediately distinguished himself as Mitchell’s student at Columbia. It was Kuznets who, near the beginning of a 34-year affiliation with NBER, compiled a list of recession dates under Mitchell’s supervision in 1929 and then, at the behest of the Commerce Department in the 1930s, devised the system of national income accounts that, with a nudge from innovators across the Atlantic, eventually spawned GDP.
For the latter work, Kuznets received the third Nobel Prize awarded in economics, in 1971. Meanwhile, Mitchell’s handpicked successor at NBER, Arthur Burns, went on to great prominence as an adviser to Republican presidents and then chairman of the Federal Reserve. Milton Friedman and Anna Schwartz’s influential 1963 “Monetary History of the United States” was an NBER project.
The organization’s empiricist obsession with the business cycle began to fall out of favor among academic economists after World War II. In a famously withering review of Burns and Mitchell’s 1946 book, “Measuring Business Cycles,” mathematical economist Tjalling Koopmans (winner of the economics Nobel in 1975) complained that in it “the movements of economic variables are studied as if they were eruptions of a mysterious volcano whose boiling caldron can never be penetrated.”
He had a point! It’s not just that the why of the business cycle is mostly ignored in the book, the what isn’t exactly made crystal clear either. “Our definition presents business cycles as a consensus among expansions in ‘many’ economic activities, followed by ‘similarly general’ recessions, contractions, and revivals,” Burns and Mitchell write. “How ‘general’ these movements are, what types of activity share in them and what do not, how the consensus differs from one cyclical phase to another, and from one business cycle to the next, can be learned only by empirical observation.” Got that?
At one point the pair do suggest that the “simplest method” of determining the timing of a business cycle “would be to mark off the months in which the specific cycles of an acceptable measure of aggregate economic activity reached successive peaks and troughs,” and note that quarterly and even monthly estimates of just such a measure, GNP, were under development. We’re still waiting on official monthly GNP or GDP numbers, though, and the quarterly ones are subject to revisions years and even decades afterwards that can flip positive quarterly changes to negative and vice versa.
The NBER determinations of recession dates, while they don’t ignore GDP, have thus tended to focus on more-timely and less-prone-to-revision monthly data series. An ever-shifting array of data series, it turns out. As University of California at Berkeley economists Christina Romer and David Romer described in a historical review presented at the January 2020 annual meeting of the American Economic Association (video here, pdf download here), the unemployment rate has gone in and out of favor as a recession metric while NBER researchers have through the decades cited such measures as bank debits outside New York City, freight-car loadings, business failures, corporate profits after taxes and imports, as well as more obvious ones like nonfarm payroll employment, industrial production and personal income.