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Regional Economy
How
to Call Texas Recessions
John
Thompson looks at the indicators economists use to determine the
path of an economic downturn.
After expanding
for 10 years straight, the national economy slid into recession
in March 2001. Since then, the Texas economy has sustained losses
in employment and experienced flattened output growth. Now, 24 months
after turning down, the state economy is still trying to stabilize.
But did Texas ever go into recession? And if it did, has it followed
the nation—which began recovering around December 2001—out
of recession?
Economists rely
on several key indicators to provide information that can help them
determine the path of an economic downturn. This article analyzes
these indicators and answers the recession question for Texas.
What
Is Recession?
In the popular press, a recession is often defined as a period of
at least two consecutive quarters of declining output. The National
Bureau of Economic Research (NBER), which calls business cycles,
defines recession as "a significant decline in activity spread
across the economy, lasting more than a few months, visible in industrial
production, employment, real income, and wholesale and retail trade.”
More than just a period of diminished activity, a recession is a
period of diminishing activity.[1] To make this determination,
the NBER looks at many indicators, focusing particular attention
on timely monthly measures of economic activity.
Since some facets
of the NBER's definition can only be confirmed on a lagged basis,
it usually doesn’t take a stand on business-cycle dates until
some time after a change in direction is evident. Such was the case
in November 2001, when the NBER’s Business Cycle Dating Committee
determined that the U.S. economy peaked in March 2001. And even
though most economists believe the nation emerged from recession
in December 2001, the NBER has not yet determined an ending date
to the recession.[2]
Basis
of NBER Decisions
At the national level, the NBER examines four coincident indicators—or
economic indicators that tend to move with the overall economy.
Industrial
Production. The industrial
production index gauges the variation in output in national manufacturing,
mining, and electric and gas utilities. It is responsible for a
large fraction of the change in total output and is therefore tracked
by the NBER as a valuable indicator of the present state of the
economy. The Federal Reserve Board produces this data series.
Personal
Income. Real personal
income less transfer payments calculates household income from employment,
self-employment and investments. Personal income is important because
it can be used to predict future consumer spending trends and because
prolonged weakness in its growth signifies a reduction in consumer
demand. Reduced consumer spending can negatively affect overall
economic activity since it accounts for 68 percent of GDP. The Bureau
of Economic Analysis produces the personal income data series.
Manufacturing
and Trade Sales. Manufacturing
and trade sales measure the volume of real sales in the manufacturing,
wholesale trade and retail trade sectors. Long-term trends in manufacturing
sales and wholesale trade are indicative of rising or falling inventory
levels. Changes in retail sales indicate variations in consumer
spending patterns. The Bureau of Economic Analysis and the Commerce
Department compile the manufacturing and trade sales data.
Payroll
Employment. Payroll
employment is a measure of the current number of nonagricultural
jobs. Total job count is based on a monthly survey of business establishments.
The employment situation is one of the most widely followed economic
statistics because of its timeliness, accuracy and importance in
estimating overall economic activity. The Bureau of Labor Statistics
compiles the employment data.
Coincident
Index. As a compilation of the above four, the coincident
index is designed to mirror changes in overall economic activity.
Though the NBER generally does not cite the coincident index in
its releases, it remains a convenient measure because of its at-a-glance
nature. The Conference Board compiles the coincident index.
What
About Calling Recessions in Texas?
While
the NBER settles recession-dating matters at the national level,
no such entity exists for calling Texas recessions. Consequently,
researchers at the Dallas Fed worked to develop a transparent methodology
for ascertaining business peaks and troughs in the state.
The same variables
tracked by the NBER to determine business-cycle dates are not all
available at the state level or in the desired frequency. Nevertheless,
the Dallas Fed has compiled a list of economic variables that are
generally coincident with the overall state economy. Analysis of
these variables can paint an overall picture of the current economy
and can help determine business-cycle dating at the state level.
Variables examined by FRB Dallas include employment growth, the
unemployment rate and gross state product growth, which are the
components of the Texas Coincident Index, created by Keith Phillips
of the Dallas Fed.
Employment
Growth. Texas payroll
employment is a measure of the current number of nonagricultural
jobs. Total job count is based on a monthly survey of business establishments.
As at the national level, the Texas employment situation is one
of the most widely followed economic statistics because of its timeliness,
accuracy and importance in estimating overall economic activity.
The Bureau of Labor Statistics compiles the employment data.
Unemployment
Rate. The unemployment rate is the number of unemployed
workers in the labor force divided by the labor force. At the national
level, the unemployment rate is a leading indicator at cycle peaks
and a lagging indicator at troughs. At the state level, statistical
analysis shows the Texas unemployment rate to be roughly coincident
with overall economic activity. Rises in the unemployment rate suggest
softening in economic activity, whereas downward pressure in the
measure indicates increased activity and labor tightness. The Bureau
of Labor Statistics compiles the unemployment data.
Gross
State Product. Texas gross state product (GSP) is
a comprehensive measure of statewide economic activity. The Bureau
of Economic Analysis estimates real GSP but the series is severely
lagged (usually about two and a half years after the reporting year).
The untimeliness of this series severely limits its usefulness.
Researchers at the Dallas Fed have gotten around this problem by
using quarterly personal income and various price measures to accurately
predict movements in total Texas GSP. However, even this improved
series comes out about four months after the reporting quarter.
Nevertheless, gross state product is an important indicator of economic
activity because of its comprehensive scope.
Texas
Coincident Index. A
succinct picture of the overall economy emerges as we examine a
composite index. The Texas Coincident Index is an economic statistic
that combines employment growth, the unemployment rate and GSP to
gauge the current state of the Texas economy. [3] Historically,
movements in the index have coincided with changes in overall economic
activity (as measured by employment and output). In other words,
during periods of economic expansion the coincident index increases;
when the economy contracts, the index falls. For these reasons,
the index is a useful at-a-glance series for determining the current
dynamics in the Texas economy.
Current
Conditions
Texas went into recession in March or April 2001, and the state
job market has yet to get back its legs. Economic frailty continues
to be manifested in the employment figures. Since peaking in March
of 2001, Texas has lost 155,500 jobs (Chart 1). With month-over-month
employment growth figures bouncing from positive to negative territory,
labor market trends have been anything but conclusive (Chart
2).
Chart
1
 |
Chart
2
 |
The Texas unemployment
rate has skyrocketed since bottoming out at 3.9 percent in December
of 2000. It hiccupped a few times over this rise but has not yet
manifested any clear signals of an improvement in the overall labor
market (Chart 3).
Chart
3
 |
Year-over-year
growth in Texas GSP turned positive in the third quarter of 1987
and continued in positive territory until the third quarter of 2001.
The state then sustained three consecutive quarters of declines
in year-over-year GSP growth. Growth resumed in the second and third
quarters of 2002, as the year-over-year figure turned positive again
(Chart 4). Quarter-over-quarter figures have been positive
since second quarter 2002.
Chart
4
 |
Month-over-month
changes in the coincident index turned negative in March of 2001
and remained in the red until December of 2002. Readings since then
have suggested mild improvements in the overall state economy (Chart
5).
Chart
5
 |
Texas
Economy More Stable
Calling recessions for Texas is a slippery task. To help answer
questions regarding the state’s business cycle, the Federal
Reserve Bank of Dallas has constructed the Texas Coincident Index
to determine turning points in the state’s economy. Based
on this methodology and the data we currently have available, the
coincident index suggests that the Texas economy seems to have emerged
from recession at the end of 2002. However, the data that the index's
latest readings are based on are preliminary and subject to revision.
As with the NBER, a final determination of business-cycle dates
must wait until the data accurately and clearly manifest a change
in economic activity.
Additional
Information
“New
Economy, New Recession?” Evan F. Koenig, Thomas F. Siems
and Mark A. Wynne, Federal Reserve Bank of Dallas Southwest
Economy, March/April 2002
“A
New Quarterly Output Measure for Texas,” Franklin D. Berger
and Keith R. Phillips,Federal Reserve Bank of Dallas Economic
Review, Third Quarter 1995
"A New
Monthly Index of the Texas Business Cycle," Keith R. Phillips,
Federal Reserve Bank of Dallas, forthcoming third quarter 2003.
Note
| 1 |
NBER, November
26, 2001, “The Business-Cycle Peak of March 2001.” |
| 2 |
On average
the NBER takes about 10 months to make definitive statements
on business-cycle dates. |
| 3 |
GSP figures
into the Coincident Index as it becomes available—usually
four months after the reporting quarter. |
| John
Thompson is an associate economist at the Federal Reserve
Bank of Dallas.
SUGGESTED
CITATION:
Thompson, John (2003), "How to Call Texas Recessions,"
Federal Reserve Bank of Dallas Expand Your Insight,
May 2, 2002, http://www.dallasfed.org/eyi/regional/0305recession.html |
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