The C.D. Howe Experience with Business Cycle Dating · Steve Ambler (Ecole des sciences de la...

The C.D. Howe Experience with Business Cycle Dating

Steve Ambler

Ecole des sciences de la gestion, Universite du Quebec a MontrealDavid Dodge Chair in Monetary Policy, C.D. Howe Institute

[email protected]

International Seminar on Business Cycle DatingINEGI / CIDE, Mexico City, October 2019

Steve Ambler (Ecole des sciences de la gestion, Universite du Quebec a Montreal David Dodge Chair in Monetary Policy, C.D. Howe Institute [email protected])The C.D. Howe Experience with Business Cycle DatingInternational Seminar on Business Cycle Dating INEGI / CIDE, Mexico City, October 2019 1 / 37

Introduction

Reflects my own views and not those of the C.D. Howe Institute

Pdf version of these slides:www.steveambler.uqam.ca/papers/cdhowecycles.pdf

Detailed references and links for all citations:www.steveambler.uqam.ca/papers/cycles.pdf

C.D. Howe Business Cycle Council home page:https://www.cdhowe.org/council/business-cycle-council

References to all Business Cycle Council communiques andpublications: “BCC”


www.steveambler.uqam.ca/papers/cdhowecycles.pdf

www.steveambler.uqam.ca/papers/cycles.pdf

https://www.cdhowe.org/council/business-cycle-council

Introduction (cont.)

From the Business Cycle Council’s home page (BCC n.d.):

The C.D. Howe Institute Business Cycle Council is an arbiter ofbusiness cycle dates in Canada. The Council meets annually, orwhen economic conditions indicate the possibility of entry to, orexit from, a recession. The Council also acts as a conduit forresearch aimed at developing a deeper understanding of how theeconomy evolves and to provide guidance to policymakers. TheCouncil performs a similar function to the National Bureau of Eco-nomic Research (NBER) Business Cycle Dating Committee in theUnited States. The Council is comprised of Canada’s preeminenteconomists active in the field. Members of the Council participatein their personal capacities, and the views collectively expresseddo not represent those of any institution or client.


Outline

1 Introduction

2 Formation and Guiding Principles

3 Definition of a Recession

4 Data Revisions

5 The 80/20 Rule in Action

6 Conclusions


Formation

Statistics Canada got out of the business cycle dating business whenit stopped publishing its Composite Leading Indicator in 2012

C.D. Howe has several other policy councils fostering research onpolicy issues: Competition, Energy, Financial Services, Fiscal and TaxCompetitiveness, Healthcare, Human Capital, InternationalEconomics, Monetary Policy, Pensions

Adding a Business Cycle Council was a logical fit

The Institute is not the “official” arbiter but has acquired enough of aprofile since 2012 that it is considered the de facto arbiter


Formation (cont.)

Cross and Bergevin (2012)1 First systematic historical dating of Canadian cycles since 1926 except

for StatsCan2 Philip Cross: former chief economist at StatsCan3 Philippe Bergevin: former Senior Policy Analyst at C.D. Howe


Formation (cont.)

First meeting (BCC 2012)1 Announced the dating of the 2008–2009 recession2 Approved and called attention to reference dates3 Announced intention to meet on an ad hoc basis to call turning points

(a la NBER)

Events intervened (2015 downturn and October 2015 federal election)which provided an impetus to hold regular meetings (more below)


Formation (cont.)

From BCC (2012):

Canadian Recessions since WWII

Peak Trough Category

2008:10 2009:05 41990:03 1991:04 41981:06 1982:10 41980:01 1980:06 11974:12 1975:03 21960:03 1961:03 31957:03 1958:01 31953:07 1954:07 41951:04 1951:12 31947:08 1948:03 2

Note the categories (1–5) (more below)


Guiding Principles

C.D. Howe is a registered charity

No funding or donations from government or political parties in orderto preserve its independence


Guiding Principles (cont.)

Members are volunteers except for a C.D. Howe Associate Director asan ex officio member (Jeremy Kronick)

Invitations to join from C.D. Howe management after broadconsultation with in-house and external experts

No fixed term limits

Active participation in meetings taken as willingness to serve

Individuals with too many commitments or in conflict of interestwithdraw voluntarily (eg. Paul Beaudry, now Deputy Governor of theBank of Canada)

Members participate in annual meetings and ad hoc meetings



Meetings financed from C.D. Howe budget

Meetings are low-cost

Members living close come in for the day, otherwise they participateby conference call

Small travel budget available for members not too far away and/orwho participate in one of the C.D. Howe’s other Councils

No funds for members to hire staff

Internal chairs do a lot of prep work for the meetings: updating data,distributing background material and written briefs from members,etc.



Council also fosters research related to business cycle analysis

Three prominent examples: Cross (2016), Cross (2017), Kronick(2016)

Papers linked on Council’s main web page

Outside contributors of major papers (Commentaries, E-briefs) receivean honorarium

Data are available on line (link on the BCC home page)



The criteria for declaring recessions are flexible and have been refinedover time (more in next section)

Patterned after the NBER

Leave room for judgment

Latest iteration is linked on the Council home page and on my pageof references (BCC 2017b)


Definition of a Recession

From BCC (2017b): Council “defines a downturn as a recession ifthere is, broadly speaking, a pronounced, persistent, and pervasivedecline in aggregate economic activity. In other words, to identify arecession three dimensions need to be considered simultaneously:amplitude, duration, and scope.”

Decline in economic activity over one quarter is necessary but usuallynot sufficient

Amplitude: drop of at least 0.1 percent, and “validated byaccompanying weakness in contiguous quarters, but not necessarily byoutright decline”

Implies net contraction or at least stagnation over two quarters


Scope or Breadth as a Criterion

Complicated in Canada because there is diversity across industriesand also very much across regions

Use of two different (internal) diffusion indexes

Raw diffusion: unweighted average centred on 50 of expanding,stagnant (less than 0.05 percent change in output in either direction)and declining industries

Kronick (2016): index based on principal components (also centred on50) as a more rigorous way of measuring the breadth of a downturn

Above 50 ⇒ more expanding industries than contracting industries


General Methodology

Begin w/ quarterly GDP and employment data to identify candidaterecessions

Use more granular monthly data to determine dates of peaks andtroughs

Industry-based (monthly) GDP available since 1961, IP (monthly)before 1961

Employment less sensitive to downturns in GDP before 1980

Expenditure-based GDP (quarterly) available since 1961

Preferred measure is an average of expenditure-based andindustry-based GDP


Severity of Recessions

Cross and Bergevin (2012) developed the following classificationsystem

1 Category 1: short, mild drop in real GDP, no decline in quarterlyemployment

2 Category 2: similar drop in real GDP to Category 1, but enough toelicit a drop in employment, often because the contraction is quitesevere in some sectors of the economy

3 Category 3: longer, more marked decline in real GDP, often followed bya drop in employment

4 Category 4: substantial decline in real GDP and employment, usuallyfor a year or longer

5 Category 5: extremely rapid contractions in GDP and employment overan extended period of time (two, both before WWII)


Data Revisions

All statistical agencies publish data revisions for current series such asGDP

Cross (2017) analyzes in detail how StatsCan revises its data (currentseries and periodic retrospective revisions due to changes in definition)

Every macroeconomist probably complains about his/her nationalstatistical agency and its practices

Canadian macroeconomists certainly complain about StatsCan


Data Revisions (cont.)

Gordon (2014):

Statistics Canada must be the only statistical agency in the worldwhere the average length of a data series gets shorter with thepassage of time. Its habit of killing off time series, replacing themwith new, ‘improved’ definitions and not revising the old numbersis a continual source of frustration to Canadian macroeconomists.



One consequence is the resulting difficulty in constructing a longhistorical chronology

Gordon (2014):

Phil Cross is probably the only person in the world who couldhave pieced together this business cycle chronology, because asa former StatsCan analyst, he knew that StatsCan had data (infragments, of course – it wouldn’t do for StatsCan to maintain along series) for things like unemployment rates going back severaldecades before the LFS.



Project Link: one-man project by Stephen Gordon (Universite Laval)

1 Track major revisions in series2 Create long time series by splicing together series from different time

periods when StatsCan does not revise backwards in time

Gordon (2014, 2016, 2017, 2018, 2019)

Council hasn’t had to use this (unofficial) source of data

Retrospective revisions have only had an impact on two recessions:1974–75 and 1980 (more below)

Revisions to current series had an impact on the status of the 2015downturn


The 80/20 Rule in Action

Much of our effort has gone into one recent candidate for a recession,the 2015 downturn

The downturn was borderline in terms depth, persistence, and breadthof the decline in GDP

Data revisions by StatsCan meant that the measured declines couldhave easily been wiped out by data revisions


The 2015 Downturn

The precipitous drop in oil prices in 2014 eventually led to twoconsecutive quarters of negative real GDP growth in the first twoquarters of 2015

Concentrated in the petroleum and related sectors

Geographically concentrated: Alberta, Newfoundland and Labrador,Saskatchewan

Lower energy costs and a lower dollar may actually have helpedcentral Canada’s manufacturing industries


The 2015 Downturn (cont.)

By the summer of 2015 it was quite clear we were probably headedfor two quarters of negative growth

Industry-based GDP for April 2015 was released by StatsCan on June30 (https://www150.statcan.gc.ca/n1/daily-quotidien/150630/dq150630a-eng.htm)

“Real gross domestic product edged down 0.1% in April, the fourthconsecutive monthly decline.”


https://www150.statcan.gc.ca/n1/daily-quotidien/150630/dq150630a-eng.htm

https://www150.statcan.gc.ca/n1/daily-quotidien/150630/dq150630a-eng.htm


Two quarters of negative growth would have meant a “technicalrecession” in popular parlance

Coincided with the run up to the October federal election

Phones at the C.D. Howe started ringing off the wall

The press wanted to know whether the Council would declare arecession before the election

Danger! Danger! Declaring a recession could have been perceivedas favouring the opposition Liberal Party, but not declaring arecession could have been perceived as favouring the incumbentConservative Party



Most economists are aware that declaring a downturn usually happenssome time after it actually begins

Convincing the press of the wisdom of waiting for definitive data tocome in became a delicate exercise in public relations


The July 2015 Communique

Council met on July 22 and released a communique on July 28

We used the following data (see BCC 2015)

Quarter Quart. GDP Two-Quart. GDP Empl.

2015:Q1 -0.2 0.4 0.22015:Q2 0.2

“The Business Cycle Council therefore determined that as of July 22,data did not provide evidence that Canada had entered an economicdownturn. The council may review its position in fall 2015.”


The 2016 Communique: No Closure

With the election of a majority Liberal government in October,interest from the press rapidly waned

During 2016, we decided to hold regular meetings because of thepossibility of data revisions by StatsCan, especially expenditure-basedGDP, which can undergo major revisions as much as 3 years after thefact

Council met on December 13 and published a communique onDecember 21


The 2016 Communique (cont.)

We used the following data (see BCC 2016)

Quarter Quart. GDP Two-Quart. GDP Empl. Diff.

2015:Q1 -0.2 0.4 0.2 55.82015:Q2 -0.1 -0.4 0.2 55.42015:Q3 0.5 0.4 0.2 52.5

“Council members determined that it was appropriate to concludethat subject to major changes to industry-specific GDP data, the firsttwo quarters of 2015 cannot be characterized as a recession.”



The following arguments were adduced

1 GDP contracted mildly in both quarters2 Employment increased in both quarters, implying at most a Category 1

recession3 The data were similar to the 1980 recession (Category 1)4 GDI continued to contract after 2015:Q25 The diffusion index was above 50 in both quarters6 Re-benchmarked GDP numbers would not be available until the middle

of 2018


The 2017 Communique: Still no Closure


The release of the 2017:Q3 GDP numbers contained revisions to bothexpenditure-based and industry-based GDP for recent years

These revisions encompassed 2015:Q1 and 2015:Q2

The change in 2015:Q1 GDP went from -0.2 percent to -0.3 percent

Council judged that the change was not sufficient to change theconclusion from the previous year’s communique


The 2018 Communique: Closure at Last


Tax data from 2015 were released during 2018

Expenditure-based GDP was revised back to 2015:Q1

Industry-based GDP was revised back to 2014:01

No more major revisions to the data were expected

The size of the contraction in the first two quarters of 2015 nearlydoubled, from -0.4 percent to -0.7 percent

With 7 members taking part in an email vote after the meeting, itwas determined by a narrow majority that the 2015 downturn was nota recession



Those voting “yes” put forth the following arguments

1 Because of the downward revision to GDP growth was substantial, thecontraction was relatively severe

2 According to the C.D. Howe’s classificiation system, a Category 1recession is compatible with negative GDP growth and positiveemployment growth



Those voting “no” put forth the following arguments

1 Employment grew in both quarters2 Diffusion remained above 50 in both quarters, and revision to

industry-based GDP had almost no impact on diffusion3 Since 1961, all declared recessions have combined declining GDP with

declining employment4 A Category 1 recession is compatible with negative GDP growth and

positive employment growth, but the narrowness of breadth becamethe deciding factor in a close call


The 1974-1975 Recession

During 2017, StatsCan expanded its expenditure-based GDP seriesbackwards from 1981 to 1961:Q1 (still pretty short for time-serieswork!)

1974:Q4 growth changed from 0.2 percent to -0.2 percent

Industry-based GDP indicated that the downturn was widespread in1974:Q4 (with a diffusion index of 46.5)

Council decided to add 1974:Q4 as an additional recessionary quarter

Monthly data put the peak in 1974:10 rather than 1974:12


The 1980 Recession

The same revisions in 2017 led Council to revisit the 1980 recession

GDP growth in 1980:Q1 was revised from 0.0 percent to 0.3 percent

GDP growth in 1980:Q2 was revised from -0.2 percent to -0.1 percent

Two-quarter growth to the end of 1980:Q2 was revised from -0.3percent to 0.2 percent

Since employment growth remained positive, Council decided toremove the recession from its chronology

This removed any possible cognitive dissonance between 1980 and2015


Lessons for Dating Committees

1 Possible to function on a pretty limited budget

2 Real-time data are almost never equal to final data, so caution isadvised in the case of mild downturns

3 Calling a recession that may or may not have occurred under anincumbent government facing an election can be a political hot potato

4 However, such periods are good for increasing your visibility in themedia

5 Revisionist history is possible in the case of mild recessions (dating ofturning points and/or whether or not to call a downturn a recession)

6 If they change accounting definitions, national statistical agenciesshould be encouraged to maintain the longest data series possible


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The C.D. Howe Experience with Business Cycle Dating · Steve Ambler (Ecole des sciences de la...

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