By roughly the five-year mark after the launch of the euro in 1999, enough data had accumulated to allow an analysis of the early effects of the euro on European trade patterns. Studies include Micco, Ordoñez and Stein (2003), Bun and Klaassen (2002), Flam and Nordström (2006), Berger and Nitsch (2005), De Nardis and Vicarelli (2003, 2008), and Chintrakarn (2008). The general finding was that bilateral trade among euro members had indeed increased significantly, but that the effect was far less than the one that had earlier been estimated by Rose and others on the larger data set of smaller countries. Overall, the central tendency of these estimates seems to be a trade effect in the first few years on the order of 10-15%. None came anywhere near the tripling estimates of Rose (2000), or the doubling estimates (in a time series context) of Glick and Rose (2002).

There are three leading explanations for the discrepancy between the estimates of the euro’s effects (10-15% increase in trade among members) and those from historical estimates (doubling or tripling).

• Explanation (1): It takes time for the effects on trade to rise to their full magnitudes;
• Explanation (2): Monetary unions have much smaller effects on large countries than small countries, and
• Explanation (3): The Rose estimates on smaller countries were spuriously high as a result of the endogeneity of the decision to form a currency union; in other words, bilateral currency links have historically been the result of bilateral trade links rather than the cause.

In a new paper (Frankel, 2008), I try to assess the importance of each of these factors in explaining the discrepancy. Surprisingly, the evidence does not support an important role for any of the three explanations.

Pursuant to the question of time lags, Explanation (1), I have updated the estimates. The effect of the euro on trade between members remains high significant statistically, but no higher in magnitude than it was four years ago; it is steady at 10-15%. It is entirely possible that the future will reveal substantially larger effects as substantially more time goes by. But at the moment there is little evidence to support the lags explanation.

Pursuant to the question of country size, Explanation (2), I tested for an effect of the interaction of size and currency union membership. There is no tendency, overall, for currency unions to have larger effects on the trade of small countries than large.

The question of endogeneity, Explanation (3), is trickier. I tried a “natural experiment,” designed to be as immune as possible from the argument that the choice of currency is endogenous with respect to trade. The experiment is the effect on African CFA members’ bilateral trade of the French franc’s 1999 conversion to the euro. The long-time link of CFA currencies to the French franc has clearly always had a political motivation. So CFA trade with France could not in the past reliably be attributed to the currency link, perhaps even after controlling for common language, former colonial status, etc. But in January 1999, 14 CFA countries woke up in the morning and suddenly found themselves with the same currency link to Germany, Austria, Finland, Portugal, etc., as they had with France. There was no economic/political motivation on the part of the African countries that led them to an arrangement whereby they were tied to these other European currencies. Thus if CFA trade with these other European countries has risen, that suggests a euro effect that we can declare causal. The dummy variable representing when one partner is a CFA country and the other a euro country has a highly significant coefficient of .57. Taking the exponent, the point estimate is that the euro boosted bilateral trade between the relevant African and European countries by 76%. It is not doubling, and the timing is imperfect. But it does suggest that the effect on trade among small countries is very substantial even after correcting for endogeneity.

Thus none of the three explanations appears to explain the gap between the recent euro estimates and the historical estimates. Perhaps time will offer more evidence for one or more of the explanations in the future. For the moment, the gap remains something of a mystery. But promotion of trade must nevertheless be counted one of the successes of the euro. If Rose had come up with a 15% effect on trade from the beginning, that would have been considered important. Furthermore, the evidence is that the euro, like other currency unions, has not diverted trade away from non-members, which is important for judging economic welfare.

January 1, 2009, is the tenth birthday of the euro. On this occasion, everyone has been taking stock. The record of the euro shows both pluses and minuses. Looking back, the euro has in many ways been more successful than predicted by the skeptics — many of them American economists. The historic transition to a monetary union among 11 countries in 1999 went smoothly; the euro instantly became the world's number two international currency; and the officials of the European Central Bank (ECB) have from the beginning worked as citizens of Europe rather than as representatives of home constituencies. After a rocky start, the euro has achieved a strong value; the ECB has achieved a strong reputation (the tradition of the Bundesbank has not been diluted as feared); and new members to the East have achieved membership in the club.

At the same time, however, some of the skeptics' warnings have come to pass: shocks have hit members asymmetrically; cushions such as US-type labor mobility have remained thin; and the Stability and Growth Pact has proven unenforceable. Furthermore, the popularity of the project with the elites does not extend to the public, many of whom are convinced that when the euro came to their country, higher prices came with it.

One of the most interesting questions at the inception of the euro was whether the elimination of currency risk and of foreign exchange transactions costs would promote trade among members. Facilitating trade had been one of the most important of the original motivations of founders. Prior to 1999, however, most economists believed that the effects of currency barriers between countries, if even greater than zero, were small — small, for example, relative to trade barriers.

In 2000, Andrew Rose published in Economic Policy what turned out to be one of the most influential empirical papers of the decade: "One Money, One Market..." Applying the gravity model to a data set that was sufficiently large to encompass a number of currency unions led to an eye-opening finding: members of currency unions traded with each an estimated three times as much as with otherwise-similar trading partners. Many found the tripling estimate implausibly large. No sooner had Rose written his paper than the brigade to "shrink the Rose effect" (the phrase is from Richard Baldwin) -- or to make it disappear altogether — descended en masse. But their plausible methodological critiques can be answered. Authors tended to replicate the finding with a twist. Although they came away denting the magnitude of the estimate, few studies, if any, managed to shrink the estimated effect of currency barriers below the estimated effect of trade barriers.

This research was of course motivated by the coming of the euro in 1999, even though estimates were necessarily based on historical data from (much smaller) countries who had adopted (or left) currency unions in the past. But now, 10 years later, we have enough data to see the extent to which the trade-promoting effect that currency unions have showed among smaller countries also carries over to European countries. This will be the subject of my next post to follow.

The good news is that the title line in my blog post of July 17 was chosen as one of the top ten quotes of 2008 (tied for tenth place, it is true). The bad news is that the quote was attributed to Paul Krugman, who had used it subsequently on the Bill Mayer Show. The sentence is: "If there are no atheists in foxholes, there are no libertarians in financial crises." I had originally used it in 2007 as the first line of an article in a Cato Journal issue devoted to financial crises. Among the others who subsequently picked up on the line were Ben Bernanke, Mark Shields, Bloomberg, WallStreetJournal.com, Brad deLong, and Tom Keene – generally with attribution, when the format permitted.

The list of Top Ten Quotations of 2008 went out over AP on Monday, and has appeared in lots of newspapers over the last couple days. Those are the breaks. Krugman immediately set the record straight on his blog, as I knew he would.

But there are some other, more interesting, aspects.

One is an illustration of how tough is the world in which highly visible columnists like Krugman live. There are lots of Krugman-haters out there. Of course the phenomenon originates in the fact that he consistently has been liberal and anti-Bush (not precisely the same thing). But the antipathy goes very deep. The Yale/AP list was called to my attention yesterday by one Joel West. I told him I was indebted to him for pointing out the misattribution. But I also told him that I was sure that there had been no desire on Paul's part to steal my line: TV shows like Bill Maher don't customarily allow their guests to display footnotes. But Mr. West must be one of the Krugman-haters, because his subsequent blog post blithely accused Krugman of dishonesty. As had another Krugman-hating blog post before that. These people are eager for ammunition against someone of a different ideological persuasion and are not sufficiently discriminating about what they use.

Ironically, of the other two soundbites that share tenth place on the Yale/AP list with the atheists-libertarians quote, one is something else attributed to Krugman ("Cash for trash"), and the third is from the all-time champion Krugman-hater, Donald Luskin. Luskin earned the Top Ten honor when quoted as saying "Anyone who says we're in a recession, or heading into one -- especially the worst one since the Great Depression -- is making up his own private definition of 'recession'" in the Washington Post, September 14. This was of course after a huge fraction of economic commentators had already decided that the country was probably in recession, as turns out to have been the case. (I myself took a bit of grief on various blogs both for saying it too early and also for saying it too late.)

The atheists-and-libertarians line itself has also drawn some grief from two minority communities -- atheists and libertarians -- on various blog sites. I don't mean to put these two philosophies together (although that would be an interesting essay question on some exam). Nor is it the case that either group is objecting to being associated with the other. But both have pointed out that the statement is not literally true. They are entirely correct: There are plenty of atheists in the military; and there are plenty of libertarians in a financial crisis. But of course the statement did not literally mean there are no atheists in foxholes or lilbertarians in financial crises. The claims are, rather, that on average: (i) soldiers under fire tend suddenly to grow more religious in outlook, and (ii) policy-makers facing a financial crisis tend suddenly to grow more interventionist in outlook. If anything, I admire the intellectual consistency of those that do not change their views under such pressure. 1) Yes there really are atheists in foxholes. They are a minority, but a substantial one. (2) And yes there really are libertarians in financial crises. Again a minority, but not to be dismissed.

Every two years, Harvard Kennedy School hosts the newly elected Members of Congress for a three-day “briefing” on a wide variety of topics. We had an excellent turnout of forty this week, new congresspeople from both parties. I participated in a panel titled “Understanding the Economic Crisis,” along with Greg Mankiw, Elizabeth Warren and Robert Lawrence (on video).

Trying to explain the financial crisis and recession in ten minutes, even to the extent any of us understands it, was a tall order. But I tried to cram it all into a single slide. Here it is.

The National Bureau of Economic Research today announced that its Business Cycle Dating Committee had officially determined a peak in economic activity at December 2007, which signals the start of the recession. I am a member of the committee. Though I speak only for myself, not the committee, I offer my views on two questions of possible interest:

(1) Who needs the NBER Business Cycle Dating Committee (BCDC) anyway?

(2) Why did we pick December 2007 as the starting month of the recession?

(1) We sometimes hear the question "Who needs the NBER Committee anyway?" This question most often comes in one of two forms:

(1a) Everyone in the real world has known that the economy has been in a serious recession for some time. In past cycles, media reports have sometimes taken the line "Ivy Tower Eggheads Finally Figure Out What Everybody Else Has Known All Along." The implicit critique is that the committee takes too long after the event -- typically almost a year -- to make its declaration. One short answer is that our job is to be definitive, not fast. GDP and other government statistics are often revised after the fact, for example. We don't want to have to revise our dating of the peaks and troughs later, in part because it would sow confusion among those who rely on them (from econometric researchers to political speechwriters). We leave it to others -- pundits, forecasters, consulting companies, financial newsletters, and so on -- to try to get there first. We deliberately get there last.

(1b) The other form taken by the question "Who needs the NBER committee?" runs as follows: "The rule of thumb is simple: two consecutive negative quarters of GDP growth. Why complicate things?" The Frequently Asked Questions segment of the BCDC announcement answers this in detail. For now, observe simply that questions (1a) and (1b) are inconsistent with each other. As of December 1, 2008, the US economy has not yet experienced two consecutive negative quarters. So an argument that we should wait for two consecutive quarters (critique 1b) is the opposite of the critique that we should have acknowledged a recession before now (critique 1a).

(2) The more important question is: Why did we pick December 2007 as the start of the recession? As is the case surprisingly often, different economic indicators give very different answers to the date of the peak.

Of the monthly indicators to which the BCDC gives primary attention, the most important is jobs, more specifically Payroll Employment (from the Labor Department's Bureau of Labor Statistics). It peaked in December 2007, and has been declining ever since. My personal favorite indicator is Total Hours Worked (which is closely related, because it is number of people employed times the average number of hours per worker). Hours Worked also peaked in December, as shown in the graph below.

Of the quarterly indicators, the most important is aggregate economic activity, more specifically, Output. The Commerce Department's Bureau of Economic Analysis computes two measures of output: Gross Domestic Product (GDP) and Gross National Income (GNI). The two should be the same in theory, but differ in practice due to measurement errors. GDP receives far more public attention, but in fact has no claim to be a more accurate measure of output than does National Income. The statistics currently available show that GNI peaked in Quarter 3 of 2007, whereas GDP peaked in Quarter 2 of 2008. A simple-minded average of the two peak dates would seem to point to midnight of New Year's Eve, December 2007, as the peak. Another (comparably unsatisfactory) way of forcing the output data to cough up a precise month is to look at Personal Income, which is available monthly. The BCDC's computed measure of real personal income less transfers peaked in December 2007.

It would be wrong to claim that all roads arrive at the same destination, December 2007. Other indicators point to other dates, some earlier, some later. If we are very lucky, revisions that the BEA makes in July 2009 will help resolve the discrepancy between the GDP and GDI measures somewhere in the middle. But perhaps the best characterization of the output measures is that they show a rough plateau from the fall of 2007 to the summer of 2008. That the employment statistics speak more clearly allows them to have the predominant say.

Over the last 24 hours, President-Elect Obama has announced his new economic team. What do they all have in common?

Retreads from the Clinton Administration? Rubin protéeacute;géeacute;s? No, not all.

Friends of mine? Well, yes. As it happens, they have been friends, for 12-to-30 years. (god forgive me. There is no greater turnoff in a column than an author who thinks it's "all about me." On the other hand, this isn't a column. It's just my personal blog. So what the hell.)

Yesterday, President-elect Obama formally introduced Larry Summers as his choice for Chair of the National Economic Council and Tim Geithner as his choice for Treasury Secretary. Both excellent choices.

At the same time, he introduced Prof. Christina Romer as his choice for Chair of the Council of Economic Advisers. Christie was my colleague for 20 years in the Economics Department at the University of California, Berkeley; she and her husband David Romer form a team who were my favorite daily lunch companions during that period. Although this is her first policy job, she is another excellent choice. She, together with Fed Chairman Ben Bernanke, have the added bonus of being among the world's top experts in the monetary history of the Great Depression, an expertise that is of unexpected benefit at the current juncture.

Today, Obama also announced Peter Orszag as his choice for Director of the Office of Management and Budget. In 1996, when I arrived at the Council of Economic Advisers, Peter was a Senior Staff Economist at CEA, working on international economics. Even then his extraordinary abilities had made him indispensable to top officials. He was the sort of person who rises very quickly in a merit-oriented government: not just extraordinarily smart, but able to get lots of things done very quickly and very well. When Peter returned from a quick spell at the London School of Economics (finishing his doctoral degree), he moved to a key position on the National Economic Council staff. More recently, he has been director of the Congressional Budget Office. This position at the Capitol Hill end of Pennsylvania Avenue is the counterpart to the OMB Director job at the White House; thus Orszag will "hit the ground running" with respect to the budget, in the same way that Geithner will with respect to the financial crisis.

Irrelevant gossip: At the height of the East Asia crisis in 1998, I hosted a party in honor of Peter Orszag. The party is mentioned in Paul Blustein's The Chastening (which remains the book that gives the best blow-by-blow account of the East Asia crisis), because Joe Stiglitz took Stanley Fischer outside on the doorstep to voice in person the critiques of the IMF's management of the crisis that he had been making in public. The reason they went outside was so that Larry Summers, who was managing the crisis from the Treasury, could not hear them inside.

No, the reason that Obama chose this team is that they are The Best and Brightest and The Least Arrogant. As he says, the American people want effectiveness.

The phrase "The Best and the Brightest" comes readily to mind because their IQs are off the chart. After 8 years of the current President and his appointees, I hope that the American public, despite its understandable anti-elitist bias, understands that intelligence and ability do actually matter.

But IQ in an academic sense, by itself, is a very incomplete qualification for higher office. Many university professors are famous for being as bad at social skills, personnel management, openness, and humility as they are smart – all abilities which are just as important in policy making. Indeed, the phrase The Best and the Brightest comes from the famous book by David Halberstam, where the phrase is meant ironically since the Kennedy brain trust screwed up so badly in Vietnam. The McNamaras were arrogant in the same sense as Cheney and Rumsfeld: when reality diverted from their pre-conceptions (whether in Asian wars or other policy areas), they stubbornly refused to process the discrepancy and to adjust course. But the Obama team is different. It is The Best, the Brightest, and the Least Arrogant. With one possible exception, these people have no ego, no rough edges. They are not close-minded or stubborn. They are not ideologues. They will scoop up facts and arguments, on all sides of a policy question, before making a decision; and even after a decision has been made, they will monitor new information as the situation develops and adjust course when necessary. These traits, more than anything, has been missing from government in recent years.

Many will object to this description with the observation that Larry Summers is famous for being arrogant. Summers' arrogance is a little overdone, compared to some others I could name. But it is true that Larry's personality is not ideally suited for the traditional job description of the Chair of the National Economic Council, which is to be an honest broker (in the classic phrase of Roger Porter's early description of the proto-position). The NEC manages the decision-making process in the White House. It must make sure that every agency feels that its views have been heard and fairly represented to the president. ("Agencies" here means not just cabinet departments like Treasury, State, Commerce, Labor, Agriculture, HHS, etc., but also White House agencies such as CEA, OMB, NSC, etc.) It is evident that Larry was given the title of NEC Director so that he could have the status of Principal, which means he gets a seat at the table in cabinet-level meetings, as opposed to having to sit in the row behind, where the top aides sit. I am sure that Obama realizes that Larry is not perfectly suited to the honest-broker role. (The same was true of Larry Lindsay, who was fired from the NEC Director position by George W. Bush not just because he correctly forecast that the cost of the Iraq war would be higher than the official line. He did not have a lot of interest in running the policy process, and was rather more interested in expressing his own views to the President, as compared to his more bureaucratically inclined successors.)

Not to worry. The Wall Street Journal has evidently reported that the NEC will have Jason Furman as Deputy Director. Jason, who has been Obama's Economic Policy Director during the national campaign, could not possibly be better suited to the job of running the policy process as an honest broker. He is a young version of the others: brilliant, tireless, non-ideological; no ego, no rough edges, a team player. I know. He worked for the CEA in 1996 and 1997.

The Best, The Brightest and the Least Arrogant. Current conditions are so bad it would be foolish to make an optimistic prediction about economic performance over the coming years. But I will make the prediction that this team will function like clock-work, and give the country the most capable economic policy making it has had in many a decade.

News services reported today that Tim Geithner, currently President of the Federal Reserve Bank of New York, was President-elect Obama’s choice to be Secretary of the Treasury. The markets reacted very positively to the news. This presumably captures both relief that some policy uncertainty has been resolved at this critical juncture and approval that Geithner is the man chosen. I share the pleasure at this appointment.

Tim Geithner is refreshingly straightforward and personable, and doesn’t “stand on ceremony.” At the same time, he is cool and unflappable. By coincidence, the Economic Advisory Panel to the NY Fed President, of which I am a member, met today. Unusually, Geithner excused himself at two points in the four-hour meeting to take short phone calls. Given the timing, it seems very likely that one of the phone calls was Senator Obama offering him the Treasury position. These Panel meetings are off the record, but I think I am not betraying any confidences to report that Geithner betrayed no sign to us of what had just happened. No change in demeanor, no change in the substantive flow of the discussion. This is a guy who does not lose his cool. Just what the country needs.

Everyone speculating on President-Elect Obama's most likely choice for Secretary of the Treasury has the same two names: Larry Summers and Tim Geithner. I have known them for a long time, and worked with both in the Clinton Administration. Either one would be excellent. Geithner is now way ahead in the Intrade odds: 45% to 27% as of November 14. But my guess is that Obama will go with Summers. For one thing, Geithner is needed at the New York Fed, where he has been one of the key players managing the financial crisis.

They are both said to have baggage that might disqualify them. I disagree. Some say Geithner is tarred by association with the Bush Administration, because he has been working with it on the financial crisis. But his position is non partisan, and some continuity managing this crisis is desirable. More to the point, it was in the Clinton Administration —under Larry Summers – that Geithner rose from obscurity to prominence. Some say that Obama should not choose either of them, precisely because they are associated with the Clinton Administration and he campaigned for change. But that is the most absurd argument of all. We need somebody experienced in this job. The sort of competence these two showed at the 1993-2001 Treasury, especially at crisis management, and the track record of that Administration, is what we want to change to, not what we want to change from. All the economic indicators improved during the Clinton Administration, as surely as they have worsened since then: employment, growth, inflation, budget balance, poverty, and so on.

Most sensationally, Summers is said to be tainted by his time as President of Harvard. Too much has already been said about this. But I will make just a couple of observations. First, although Summers may not be Mr. Personality, and he will never be elected to high office nor chosen to head offices for women's rights or the environment, he has all the most important qualities for the Treasury job. Despite a tendency to say what he thinks, I don't think he committed any true faux pas or became involved in any mini-scandals during 8 years in the government — no easy feat. (The closest he came to a faux pas, or what counts for one in the media, was a statement that the argument for abolishing the estate tax was based on greed rather than efficiency — a statement that he quickly retracted without bothering to try to explain what he had meant, having already by then become familiar with the rules of political brouhahas.) In his time in Washington, he learned how to get along with politicians across the spectrum, from socialists to the far right. It's true that he wasn't able subsequently to get along with the full range of faculty in the Harvard English Department, but that is a tougher task.

Finally, I continue to be surprised at how the press describes Summers' ill-fated and ill-considered (but "off the record") remarks regarding explanations for the lack of women in academic science departments. He is most often reported as having suggested that women generally have less aptitude for science than men. I link to the text here, and urge readers to make up their minds for themselves. But I don't read his speculation about the various hypotheses quite the way many people have assumed. To me the outrageous line in the remarks was, rather, the suggestion "that no economist who had gone to work at the President's Council of Economic Advisers for two years had done highly important academic work after they returned"!

Three areas that our new President will have to address during his term in office are the recession, energy and the environment, and the long-run fiscal outlook. The recession is the most urgent. But the long-run fiscal outlook will be the most difficult. Social Security and Medicare would have made addressing the long-run fiscal outlook difficult in any case. (Did you know that the first baby-boomers are starting to draw Social Security this year?) The Bush tax cuts of 2001 and 2003 made it worse. The rapid spending increases of the last eight years made it still worse. The financial crisis and recession are now making it still worse. To be clear, fiscal stimulus today is appropriate, given the weak economy. The trick is to combine it with the minimum damage to future budgets.

I offer some recommendations to the new President regarding tax policy that address all three areas simultaneously:

1. Make clear the intent to let the Bush tax-cuts-for-the-rich expire in 2011 as scheduled. No, the Republicans can't legitimately claim that this would be a tax increase, because their budget projections (remember, the projections that said we were going to have a budget surplus by 2011) have always built in the assumption that these tax cuts would expire. This plan will help maintain some semblance of long-term fiscal responsibility and therefore help keep long-term interest rates low, which one hopes will have the Rubinomic extra benefit of promoting investment.
2. Give the 90% or 95% of American workers who don't make the highest incomes a tax cut now, as Barack Obama talked about in the campaign. This is good for incentives, good for distribution, and good for boosting demand which is what we need in the short run.
3. 3. Take steps to raise future tax rates on fossil fuels, including gasoline. This would accomplish lots of objectives:
   1. raise much-needed revenue in the future (or else help finance those reductions in tax rates on lower-income workers),
   2. enhance national security by reducing dependence on imported oil
   3. improve the trade balance
   4. reduce emissions of greenhouse gases, particularly in the future by sending the right price signal today
   5. reduce local air pollution, traffic congestion, and traffic accidents.

In the past, such tax proposals have always been considered political suicide. But here are two ideas to reduce political resistance: (i) put a floor under domestic prices of fossil fuels at current levels, by making up any future falls in world energy prices by means of taxes; (ii) respond to any future major national security setback, if it were to occur (god forbid), by asking Americans to do their part toward sacrifice in the form of energy conservation. Since the responses tried by the Bush Administration to the tragedy of 9/11 didn't work very well (invading an irrelevant country and telling Americans to go shopping), the public may be open to an intelligent response next time.

Is the United States in recession? If one looked solely at the adverse shocks that have hit the economy over the last year, one would infer an unusually high probability of a recession. If one consulted some of the most import economic measures over the last year, one would say we clearly entered a recession last January. If one gauged the popular mood, one would hear, "Of course we are in recession!"

The one criterion that has been missing is the one criterion that people most commonly have in their minds as the definition of a recession: two consecutive quarters of negative growth. This morning, October 30, the Commerce Department released the preliminary estimate of GDP in the 3^rd quarter. It showed a decline. The decline was small: just 0.3 per cent at an annual rate, and it is only quarter. But at this point there can be little doubt that we are really truly in recession.

The adverse shocks include the most severe housing bust in more than 70 years, an oil shock as big as those of the 1970s, the greatest financial crisis since the Great Depression, and the worst fiscal outlook ever. Any one of these developments would normally be enough to send an economy into recession. Leading economists from Martin Feldstein to Larry Summers have since the start of the year been warning that the downturn has arrived.

And sure enough, many of the most reliable statistical indicators have suggested all year that we are in recession.

The most important statistical criterion besides GDP is employment. Jobs peaked in December 2007 and have declined steadily ever since. The cumulative loss is 760 thousand (or 0.55%) as of September. My personal favorite among indicators is Total Hours Worked in the economy, because it combines both employment (number of people working) and average length of workweek (are they working 40 hours a week? Overtime? Part-time?). Total Hours Worked shows a similar pattern as employment, but with an even steeper decline since December: 1.4%. (The Bureau of Labor Statistics is the agency that releases these numbers, on the first Friday of the subsequent month.)

The index Leading Economic Indicators, which is designed to try to warn of turning points in advance, turned down more than a year ago. Not only that, but also the index of Coincident Economic Indicators, which is supposed to move contemporaneously with the real economy, appears clearly to indicate that a recession started toward the end of 2007.

Housing prices as of August are down 27%, relative to their peak in July 2006 (Case-Shiller composite of 20 cities). Consumer confidence, an important determinant of household spending, fell to an all-time low in September, according to the October 28 release from the Conference Board. The version collected by the University of Michigan is also looking quite bleak. Retail sales are down, especially autos. The trend in industrial production has been downward for a year, and accelerated in August and September. Corporate profits are down.

But it is still not yet officially a recession! Why not? The most important criterion for dating business cycles is real growth. The rate of change of real GDP, surprisingly, was above zero in the first quarter of 2008, and was even moderately strong in the second quarter: 2.8%. (The revised "final" estimate of GDP in the fourth quarter of 2007 did turn out to be below zero, but just barely.) It is quite a mystery why output pointed up during the first half of the year, while everything else pointed down. Clearly the demand for US goods received some boost in the 2nd quarter from tax rebates and exports, both of which are expected to diminish subsequently.

But perhaps there is some measurement problem with GDP. Gross National Income (GNI) has as much claim to measure growth as Gross National Product does. In theory the two are supposed to be virtually the same: the value of goods and services sold is conceptually the same as the value of income earned. Real GNI did in fact turn down in the 4th quarter of 2007 and the first quarter of 2008, though it rebounded in the third quarter as real output did. Real personal income – one of the indicators that the NBER Business Cycle Dating Committee looks at – has been declining almost throughout the year.

The weight of evidence is overwhelming: we are currently in recession.

Did it start at the end of 2007, when employment and the other indicators peaked? Or was the stimulus from the government and from exports enough to hold off the turning point, and did the recession thus only start towards the end of the summer, when the financial crisis intensified very sharply? I am afraid that we need to wait for some more data and some more (regularly scheduled) revisions before we will know.