The Business Cycle Dating Committee (BCDC) is the entity charged with determining the official end date of recessions.  Committee members have decided that the “Great Recession” likely ended around June 2009, but are uncomfortable making an official ruling until preliminary economic data has been revised.

The argument that the current malaise ended in mid-2009 is based on observations of GDP, Industrial Production and Non-Farm Payrolls, which have all improved since that time frame.



One member, Robert Gordon of Northwestern University, has been so bold as to criticize the BCDC for its indecision in declaring the recession to be over, arguing that a renewed downturn in GDP “is extremely implausible at any time over the next year”.

A Question of Reality

My query to the BCDC is the following:

What would happen to the economy if all Government stimulus ended today?

Would we be in a recovery if:

• Stimulus Spending were terminated
• The Federal Government balanced it budget
• The Federal Reserve increased its lending rates to normalized levels
• The Fed reversed its bloated balance sheet and unprecedented quantitative easing
• Government erected impediments to foreclosures ended (Moratoriums, HAMP, HOPE)
• The FHA ceased offering 3% down payment mortgages
• The explicit guarantee of Fannie Mae and Freddie Mac debt was abandoned
• Extended unemployment benefits stopped

It is my observation that the only reason GDP has risen is due to extraordinary and unsustainable Government stimulus.

It is well documented what happens when Government economic distortions are removed.  We have two insightful examples which occurred recently.

When Cash-For-Clunkers ended, automobile sales collapsed. 



When the original date for the home buyer tax credit expired, home sales declined by record amounts.



Dismal Reality

Mr. Gordon argues that “a drop in GDP after the current quarter should be classified as a new recession rather than a continuation of the 2007-2009 downturn.” (source WSJ 4/13/10)

This perspective reflects a lack of economic understanding.  GDP is easy to manipulate through the magic of deficit spending. 

In fact, applying Mr. Brown’s perspective we need never experience another recession.  The Government can simply borrow money and spend it following any quarterly decline in GDP.  This might meet Mr. Brown’s definition of an averted economic downturn, but it is also asinine.  The logic is equivalent to arguing that an unemployed person is experiencing real income gains by accumulating credit card debt.

What would happen to GDP if stimulus ended?  Like Cash-For-Clunkers and Cash-For-Condos, the termination of these larger Government programs would result in declining GDP as the housing market, which is undermining the economy, continues to worsen.

Mr. Brown is right that GDP will be positive as long as the Government and Federal Reserve have the political will, and capacity, to manufacture such an outcome.  But positive GDP trends are not reflective of a sustainable recovery until the economy is capable of generating such gains unmolested by the most expansive stimulus initiative undertaken in human history.