Questioning Bernanke's Use of the 'R' Word

Goldman Sachs analysts are raising an eyebrow at Ben Bernanke's admission Wednesday that a recession could be in the cards:

As Chairman Bernanke noted, the National Bureau of Economic Research (NBER) ultimately decides these matters. The inevitable lag in making that decision has exposed some of his predecessors to embarrassing claims about recessions that were unlikely even though they were already well underway....The embarrassment is compounded by the fact that the end result of the NBER's exercise is merely a label that does nothing to change the behavior of the economy. More to the point, public officials who downplay the likelihood of recession may commit policy mistakes with genuine adverse consequences if, as part of the denial, they truly misread the situation or fail to address it promptly. For its part, the economics profession should consider whether it pays to spill a lot of ink essentially to forecast what a few of its number will eventually say happened.

In fact, debating whether or not we're in a recession may be "pointless," Goldman says. Analysts are quick to note that they continue to believe the economy is in a mild recession. So why would Goldman question the act of declaring recessions when it's also declaring one? Analysts offer the following answers (which I've condensed):

1. Recession is just a label... Applying the term does nothing to change how the economy behaves or how markets anticipate and react to that behavior.

2. ...that gets applied very late... We have already stated the main reason for this, namely the lags involved in obtaining reliable (reasonably fully revised) data. These lags can be long, especially in cases where the setback or recovery does not begin decisively....Obviously, if investment or policy decisions turn on whether the economy is (let alone will be) in recession, one cannot wait for the NBER to decide the issue. Their job is to certify it, not to forecast it.

3. ...probably inducing caution from forecasters... Most economic forecasters are notoriously reluctant to say that a recession is on the way or underway, present company obviously excluded (at least in the current situation)....However, another reason that may apply more to the business economists who rely on judgmental forecasting is the combination of the two foregoing points: the "on/off" nature of the recession label coupled with the lag in getting the official word that it has occurred. Given the high profile accorded to a recession forecast, those who are risk averse will shy away from making this call when validation is many months away.

4. ...and making policymakers look clueless. As a special case of the foregoing, consider the following statements made by two prominent Fed chairmen of yore: In October 1960, six months after the onset of a fairly pronounced recession, the Federal Open Market Committee noted that "The Chairman [McChesney Martin] reiterated his views....There was a declining picture, ...but the economy was not going over a precipice by any means." ...Thirty years later, in October 1990, Chairman Greenspan said that "...the economy has not yet slipped into recession"—the one that finally began, uh, three months earlier. Well, at least he said "yet." Unfortunately, we have to admit that the Goldman Sachs U.S. economic forecast did not recognize that recession either, and we didn't even say "yet." So we have not been immune to the risk aversion noted earlier even though in that case we snatched defeat from the jaws of victory in a forecast that previously recognized the high risks of a downturn.